The Nikkei Manufacturing Purchasing Managers' Index, compiled by IHS Markit, rose to 52.7 in December from 51.2 in the previous month.
Factory activity, measured through PMI, expanded at the fastest pace in seven months, with the highest reading since May. It has remained above the 50-point threshold mark for the 29th straight month. Readings above 50 mean expansion while those below the level indicate contraction.
However, business optimism fell as companies worried about challenging market conditions.
"The uptick in Indian manufacturing sector growth signaled by the latest PMI results will be welcomed by policymakers, particularly given the concerning results observed in October," noted Pollyanna De Lima, principal economist at IHS Markit.
"Factories benefited from a rebound in demand, and responded by scaling up production to the greatest extent since May," De Lima added.
The survey also showed that optimism about output over the coming 12 months declined to its lowest since February 2017.
"The degree of optimism signalled at the end of 2019 was the weakest in just under three years, reflecting concerns over market conditions, which could restrict job creation and investment in the early part of 2020."