After receiving a walk over from Iran in the first tie of the day, India faced a tough task of taming the Malaysians and apart from national top-ranked junior Sameer Verma, none could register a win and they had to settle for the second spot in Group D.
India will now face Chinese Taipei, who topped Group B, in the mixed event elimination round tomorrow at the BBD U P Badminton Academy here.
Chinese Taipei won all its matches against Thailand, Sri Lanka and Jordon in the Group B.
India lagged behind right from the start when the mixed doubles pair of K Srikanth and K Maneesha suffered a 18-21 21-19 17-21 defeat against Nelson Wei Keat Heg and Mei Kuan Chow in a hard-fought battle which lasted for 41 minutes.
With their backs to the wall, Sameer took the court and the Madhya Pradesh lad scored a 21-10 21-12 victory over Nur Mohd Azriyn Ayub to draw level for India.
But PV Sindhu, who will turn 16 on Tuesday, couldn't get past Sonia Su Ya Cheah and her gruelling fight ended with a 14-21 22-24 loss against the Malaysian in the girl's singles.
Down 1-2, Srikanth and T Hemanagendra Babu were handed the responsibility of bringing India back into the game but Nelson Wei Keat Heg and Ee Yi Teo spoilt their broth with a 21-18 21-16 victory.
However, India still managed to finish second, courtesy their victories against Vietnam and Iran.