"The upturn was led by an improvement in customer demand as client businesses reopened, after lockdown restrictions eased amid the coronavirus disease 2019 (Covid-19)," IHS Markit said in a report.
"Output and new orders expanded at the fastest paces since February. Meanwhile, job cuts continued into August, extending the current sequence of decline to five months."
Accordingly, the headline seasonally adjusted IHS Markit India Manufacturing Purchasing Managers' Index climbed to 52 in August from 46 in July and signalled an improvement in operating conditions across the manufacturing sector following four consecutive months of contraction.
"For the first time since March, output expanded in the Indian manufacturing sector in August. Production growth was largely driven by greater client demand for Indian goods following the resumption of business operations, according to firms," the PMI report said.
"The decline in foreign exports weighed slightly on overall new orders as firms cited subdued demand conditions from abroad. That said, new business received by Indian manufacturers expanded at the fastest pace since February."
However, despite an expansion in new orders, job shedding continued in the Indian manufacturing sector.
"The relocation of employees following Covid-19 was often linked to the reduction in staffing numbers. The pace of contraction in workforce numbers softened from that seen in July but remained strong overall," the report said.
"Capacity restraints in employment drove the rise in incomplete work at Indian manufacturers midway through the third quarter."
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As per the report, the rate of increase in backlog was the fastest since December 2012.
Commenting on the latest survey results, Shreeya Patel, Economist at IHS Markit, said: "August data highlighted positive developments in the health of the Indian manufacturing sector, signalling moves towards a recovery from the second quarter downturn. The pick-up in demand from domestic markets gave rise to upturns in production and input buying."
"However, not all was positive in August, delivery times lengthened to another marked rate amid ongoing Covid-19 disruption. Meanwhile, employment continued to fall despite signs of capacity pressures, as firms struggled to find suitable workers."