India's manufacturing activity contracted in December for the first time in over two years with Nikkei's Manufacturing Purchasing Managers' Index (PMI) falling to a 28-month low of 49.1 against 50.3 in November.
A Markit-compiled Nikkei PMI reading below 50 indicates contraction, and this was the first time since October 2013 that it fell below the 50 threshold.
"India's manufacturing sector took a turn for the worse at the year-end, with already gloomy internal demand further hampered by floods in the south of the country," Markit economist Pollyanna De Lima said in the report released on Monday.
"Ending a 25-month sequence of growth, production plummeted in December. Such was the extent of the decline that the rate of reduction was the sharpest since financial crisis," she added.
The contraction in December is the worst since the financial crisis of 2008. Flow of new work orders contracted for the first time since October 2013.
The survey said December's unprecedented rainfall in Chennai impacted heavily on the sector, with fall in new work leading the companies to scale down output at the sharpest pace since February 2009.
Inflation was at a seven-month high in both input costs and output charges, the report said.
"The continued depreciation of the rupee against the US dollar pushed inflation higher, with PMI price indicators pointing to stronger increases in both input prices and output charges," De Lima said.
"Following the Fed rate hike and expectations of further increases, more currency weakness is anticipated, adding strain to businesses' dollar-priced debt and import costs," she added.
The consumer price indexed (CPI) inflation in 2015 remained well under control hovering in the range of 3.66-5.4 percent while the wholesale price indexed (WPI) inflation stayed in the negative zone for the entire 2015 and there was no inflation at all.
While the fall in commodity prices eased cost pressures, higher transport and import costs more than counteracted falling commodity prices resulting in purchase prices rising in December. Part of the increase in costs was passed on by manufacturers, the report said.
It said new work and output fell in both intermediate and investment goods segments.
Despite India's exports continuing to contract due to sluggish global demand, participants reported an increase in new business from abroad during December, which was attributed to a weaker rupee leading to enhanced pricing power in global markets.
The government's mid-year review released last month sharply lowered the economic growth forecast for the current fiscal to the 7-7.5 percent range, from the previously projected 8.1-8.5 percent, mainly because of lower agricultural output due to deficit rainfall.
