The HSBC India Manufacturing PMI -- a composite indicator that gauges the factory output and operating conditions in the manufacturing sector -- showed that the country posted a reading of 54.7 in December, up from 53.7 in November, the biggest monthly gain since January 2012.
The index has remained above 50 -- indicating growth -- for almost four years.
The data showed that the manufacturing activity was boosted by an increase in new orders and an increase in factory output, indicating a quick recovery, but the country is far from the robust growth rates it recorded in the 2000-2006 period.
New orders increased for the 45th successive month, and the new orders sub-index rose sharply to a seven-month high of 58.0 in December from 55.8 in November. The overall export orders showed upward momentum and hit their highest levels since June.
"Activity in the manufacturing sector picked up again, led by faster output growth and a further uptick in new orders, which led to a faster increase in backlogs of work as companies struggled to keep up with demand," Leif Eskesen, chief economist for India at HSBC, said.
The official data released last month by the government showcased a sharp 8.2 percent rise in industrial output, the highest gain in more than a year, which the economists had attributed to a low base year.
However, strong demand and continued growth in new export orders and depletion in inventory point toward economic recovery.
"Inflation only eased marginally, and survey respondents noted price pressures from rising raw-material costs, firm demand and the depreciated exchange rate," Eskesen stated, adding: "With growth picking up, led by firmer demand, inflation pressures are likely to remain firm in coming months."
The manufacturing sector recorded its weakest growth rate in nine months in August. The survey also showed that the input and output prices rose at a slower pace in December. However, HSBC said inflation can firm up in the coming months.
"Inflation picked up again as higher raw material prices increased input costs for firms and they had enough pricing power to pass these on to end consumers due to the firm demand conditions," Eskesen observed.
India’s wholesale price inflation at 7.24 percent in November is above the comfort levels of the Reserve Bank of India. Although the HSBC report was not an indication of India’s inflation, marginal cooling of input and output prices could take pressure out of the headline inflation rate.
The high rate of inflation, which, according to the Reserve Bank of India, is much above its comfort levels of 5 percent, has forced the Central Bank to keep the interest rates unchanged in its recent policy review meeting.