Foreign direct investment (FDI) inflows into the services sector declined by 36.5 per cent year-on-year to USD 1.02 billion during the April-July period.
The services sector, which includes banking, insurance, outsourcing, R&D, courier and technology testing, had received FDI worth USD 1.64 billion in the same period last year, as per the Department of Industrial Policy and Promotion (DIPP).
Industry experts say that most of the segments in the sector are facing problems and have cumulatively hit the sentiment of foreign investors.
"Lack of financial reforms, restrictions on outsourcing to India by developed economies, inconsistencies in policies and political uncertainties are cumulatively impacting the sentiments of foreign investors," said Krishan Malhotra, Head of Tax and expert on FDI at corporate law firm Amarchand & Mangaldas.
During the first quarter, April-June, FDI in the sector had shown 12 per cent dip to USD 945 million, as against USD 1.075 billion in the same period previous fiscal.
The services sector contributes over 60 per cent to India¿s GDP. In 2012-13, foreign investment in services fell to USD 4.83 billion from USD 5.21 billion in 2011-12.
However, DIPP officials said they hoped that the sector would attract more investments following FDI liberalisation in sectors like single brand and multi-brand retail.
The government is also considering raising the FDI cap in the insurance sector to 49 per cent from 26 per cent.
The other sectors where foreign inflows dipped during the first four months of this fiscal as compared to the previous year include construction development (township and housing), telecom, power and metallurgy.
Overall, during the April-July period, FDI has grown by 20 per cent to USD 7.05 billion, from USD 5.90 billion in the same period last fiscal.
Foreign investments are considered crucial for India, which needs around USD 1 trillion in the next five years to overhaul its infrastructure sector such as ports, airports and highways to boost growth.
Decline in foreign investments could affect the country's balance of payments (BoP) situation and also impact the rupee.