The Purchasing Managers' Index (PMI) from HSBC, which gives a snapshot of manufacturing health from output to jobs, climbed to 54.7 in December, compared to 53.7 in the previous month.

A figure of over 50 indicates growth in the sector while below 50 points to contraction.

"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," said HSBC chief economist Leif Eskesen.

Economist Sonal Varma at Nomura Securities said the PMI data was a good sign for the economy.

"The manufacturing sector after stabilising between July and October began to improve from November and inflation pressures remain under check," she said.

The survey's findings -- based on data from more than 500 manufacturers -- come after India's economic growth fell to 5.3 percent in the July-September quarter, extending a slowdown since the start of the year.

The government has forecast growth of 5.7 to 5.9 percent for the fiscal year to March, which is far below the near double-digit pace India set before the onset of the global financial crisis.

India's inflation cooled to a 10-month low of 7.24 percent in November, which is still well above the central bank's comfort zone of near five percent, and Eskesen said pressures were likely to remain.

The Indian central bank -- which has kept its benchmark interest rates on hold since April due to fears about inflation -- has suggested it may start easing monetary policy in the current financial quarter to March.