Foreign direct investment in the services sector declined by about 54 per cent year-on-year to USD 2.22 billion last fiscal, according to data from the Department of Industrial Policy and Promotion.
The services sector, which includes banking, insurance, outsourcing, R&D, courier and technology testing, had received FDI worth USD 4.83 billion during 2012-13.
The services sector accounts for over 60 per cent to India's GDP.
FDI inflows have also declined in sectors including construction development and hotel and tourism.
Foreign investments are considered crucial for India, which needs about USD 1 trillion in the 5-year Plan period ending March 2017 to overhaul infrastructure such as ports, airports and highways and boost growth.
The decline in foreign investments could affect the country's balance of payments and the rupee.
Overall foreign inflows into the country grew by 8 per cent to USD 24.29 in the last fiscal as against USD 22.42 billion in 2012-13.
To further attract foreign inflows, the government is planning to relax FDI policy in sectors such as defence, railways and construction activities.
The DIPP has already circulated a draft Cabinet note to raise FDI cap in defence to 100 per cent.
Further, Singapore has replaced Mauritius as the top source of FDI into India, accounting for about 25 per cent of FDI inflows in 2013-14.