The HSBC Manufacturing Purchasing Managers' Index (PMI), compiled by Markit, rose to 54.5 in December from 53.3, its highest since end-2012 and its 14th straight month above the 50-mark that separates growth from contraction.
Strong new business reinforces Finance Minister Arun Jaitley's view that the economy will grow "much better" in 2015/16, while weaker inflation gives the Reserve Bank of India (RBI) more room to cut interest rates as expected this year.
The survey also showed input prices slumped to a near six-year low as oil prices tumbled.
As of 11.46 a.m. the Capital Goods index of Bombay Stock Exchange gained 1.14 per cent supporting the broader Nifty, which was up 1.21 per cent.
(With inputs from Reuters)