However, export orders continued to decline and job generation remained elusive during the month, while rising inflationary pressure may go against the case for an interest rate cut by the Reserve Bank.
The Nikkei Markit India Manufacturing Purchasing Managers' Index (PMI) -- an indicator of manufacturing activity -- increased to 50.4 in January from 49.6 in December.
A reading above 50 indicates expansion while any score below the mark denotes contraction.
The main factors contributing to the above-50 PMI reading were growth of new orders and output as market conditions returned to normal and led to subsequent improvement in demand.
Lima further said that the improving confidence among firms bodes well for the outlook, with the expansion in manufacturing output likely to pick up pace in coming months.
IHS Markit forecast a 6.9 per cent growth in GDP for 2015-16, anticipating an acceleration to 7.4 per cent in 2016-17.
However, in contrast to the upturn in overall new business, new export orders fell again. Export orders eased since the previous month (December), but the rate of reduction was 'marginal', the survey said.
On the prices front, input cost inflation climbed to its highest mark since August 2014 (29-month high), while output charges were raised for the 11th successive month.
Though greater production encourages companies to purchase more inputs, it failed to generate jobs in the sector.
Disclaimer: No Business Standard Journalist was involved in creation of this content