Goals from Ken Russell (28th minute) and Nick Wilson (41st) clinched victory for defending champions New Zealand, who managed to weather the hot and humid conditions better than the Indians, whose only goal came from Mandeep Singh in the 36th minute.
Wilson's match-winner resulted from a defensive error committed by the Indians as they failed to clear the ball properly in their own striking circle.
An Indian victory today would have put them in the final, while a draw would have still kept them ahead of New Zealand. But the Black Sticks have now moved ahead into the second spot.
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India had to change the choice of their goalkeeper even before the match started as Akash Chikte was struck by a ball on his chest and the team management did not want to take any chances. Harjot Singh came on to the pitch from the start.
India earned the first penalty corner in the 20th minute and New Zealand's goalkeeper Devon Manchester brought off a fine save by slapping away a soaring drag-flick from Rupinder Pal Singh.
Pressing for an equaliser, India were rewarded by an opportunity created by Talwinder Singh's flash shot from the top of the circle. Not having the luxury of too much space, Talwinder managed to send in a fine shot that Mandeep Singh deflected into the goal.
India could have posed a threat to the New Zealand citadel four minutes later when unmarked striker S V Sunil received a high ball on top of the rival circle, but he did not make the opportunity count and sent in a directionless and feeble cross that was cleared without any problem.
Looking to restore parity, the Indians forced two penalty corners in the second half, but failed to get past the New Zealand custodian, who moved to his right to make the clearance. The sweaty hands did not seem to make the Indian penalty corner shooter's task easy.
In the 52nd minute, Chandana Thimmaiah had a good look at the goal and had only the custodian to beat, but his directionless shot simply did not cause any trouble.
In a last-gasp effort, India took off the goalkeeper to put in an additional player, but the 69th-minute move also could not help launch a late attack on the New Zealand goal.