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Prajnesh, who had entered the main draw of the men's singles event as a lucky loser in the qualifiers, fought for two hours as rain played spoilsport before he went down 4-6, 2-6, 5-7 to Japan's Tatsuma Ito.
The Indian could convert just one of the six break points he created while he saved six of the eight break points he faced in the one-hour-30-minute contest.
Prajnesh Gunneswaran made a winning start to the 2020 season but Ramkumar Ramanathan exited from the Apis Canberra International following a first-round defeat.
The Asia/Oceania Group I tie, originally scheduled for September 14 to 15, was postponed by the governing body to November 29 to 30 following a security review amid political tensions between the neighbours.
World No.5 Daniil Medvedev continued his recent good form with a 6-4 6-1 6-2 first-round win over Prajnesh Gunneswaran of India at the U.S. Open on Monday.
The 22-year-old Nagal beat Brazilian Joao Menezes 5-7, 6-4, 6-3 to make it to the main draw where he joins compatriot Prajnesh Gunneswaran.
The Indian qualifier fought hard before losing 3-6, 6-7(4) to the tall Croat, who fired 16 aces in the one hour and 13-minute contest.
Italy will now play in the World Group Finals while India will be relegated to the Zonals.
Ramkumar battled hard but it was not enough to stop Laslo Djere from winning his first Davis Cup match.
Recently-crowned US Open champion Novak Djokovic's decision to opt out of the play-offs along with world No. 33 Filip Krajinovic has raised hopes of an equal contest.