Accordingly, the HSBC India Composite Output Index, which maps both services and manufacturing, stood at 48.1, below the crucial 50 mark, for the sixth consecutive month.
The index dropped from November's 48.5, indicating a slightly faster rate of contraction.
Meanwhile, private sector employment rose. Payroll numbers were broad-based with both manufacturers and service providers posting job creation.
On price rise, HSBC said, the rate of cost inflation was only moderate and the weakest since July. Moreover, input price inflation in the private sector as a whole eased to a six-month low.
"On a positive note, inflation pressures are easing and optimism about the coming year is rising," Eskesen said.
Market analysts are of the opinion that inflation has peaked and will ease in December as food prices cool on better supplies with winter crops coming in.
In the mid-quarter review of monetary policy on Dec 18, the Reserve Bank left key policy rates unchanged but said it will hike interest rates if inflation does not subside in line with the expected declining trend.
