India's manufacturing growth, as measured by the HSBC Purchasing Managers' Index, accelerated to 57.6 in July, as against a deceleration in the previous month.
The faster growth in July was the result of a sharp increase in output.
The index had reached a 26-month high of 59 in May but had slipped to 57.3 in June, as pricing pressures dampened the sentiment.In contrast, for the first time since March 2009, China's PMI shrank in July.
Chinese manufacturing is expected to shrink as the PMI slid to 49.4 in July from 50.4 in June, mainly on account of government measures to slow down bank lending.
"This is a culmination of a trend, as manufacturing growth in China had been slowing for a few months.
The contractionary measures like rate hikes and some structural problems like wage escalation have come together and led to this," said Abheek Barua, chief economist, HDFC Bank.
China's numbers came amid indications of growth in the euro zone, where strong growth in German manufacturing pushed up the index to 56.7 in July from 55.6 in June.
The seasonally adjusted HSBC PMI is based on a survey of 500 companies. The index compiles a variety of factors such as output and employment growth, pricing pressures, order flow and delivery lags, among other indicators. A reading of over 50 indicates expansion.
India Story
The factory output index for India, which constitutes a part of the overall index, jumped to a four-month high of 62.3 in July from 60.5 in the previous month, pointing to a rate of expansion in production that was above the average growth trend since March 2009.
"India is on a roll. The economy was given another leg-up in July, as new orders continued to pour in.
Even the export sector appears to be holding up well, despite worries over cooling demand abroad," said Frederic Neumann, co-head of Asian Economics Research at HSBC, in a statement.
The growth in new orders was primarily guided by domestic demand, even as export orders did see a significant increase.
"In our view, domestic demand continues to remain strong. Other activity indicators, such as the January-March quarter GDP growth, June core wholesale inflation data, motor vehicle sales and credit growth continue to signal strength in domestic demand," Goldman Sachs' Pranjul Bhandari and Tushar Poddar said in a research note.
HDFC's Abheek Barua said a slowing of the global economy might adversely impact exports, holding back manufacturing growth.
"In the second half, due to the statistical effect and more fundamental reasons like high cost of borrowing and slowdown in the global economy, the growth in Indian manufacturing will be softer than in the first half," he added.
Jobs, pricing concerns
However, even as output levels increased, job levels remained stagnant across India's manufacturing sector during July. While new workers were taken on, there were complaints from firms of difficulties in sourcing skilled labour.
"Employment, to be sure, has dipped a little in July, but if recent trends persist, this should prove to be a blip, rather than a more fundamental deterioration in the labour market," added Neumann.
New business growth was primarily driven by domestic orders, even as export orders did show significant increase in the past two months.
Pricing pressures had dipped in the index last month. These continued to be a major concern for Indian manufacturers, despite a series of interest rate rises by the Reserve Bank of India.
Both input and output price inflation gained pace during the latest survey period. However, the pressures were weaker as compared to those prevailing in the same period a year before.
Indian manufacturers were also dogged by power outages during the month, as repeated power cuts led to an increase in pending business.
Global stock markets rose on Monday, viewing a declining Chinese manufacturing PMI as the signal of a desired slowdown. Besides, they cheered the possibility of higher than expected growth in Europe, which has been the midst of a sovereign debt problem.
Crude oil prices also rose to their highest level in almost three months.
In India, the Bombay Stock Exchange's benchmark index, the Sensex, rose by over 1 per cent, or 213 points, to close at 18,081.
The rise in share prices and the bullish outlook also spurred inflows from foreign institutional investors, resulting in the rupee touching a five-week high against the dollar.
It ended at 46.23 a dollar, as against 46.40 on Friday.