UPDATE 1-India's economic data not politically influenced - govt adviser

* India trying to improve methodology for economic data

* India’s withdrawal of banknotes from system saw falling sales

* Economic data surprised on the upside in the December quarter (Adds more quotes from adviser)

HONG KONG, March 29 (Reuters) - India’s chief economic adviser rejected the notion that official data was politically influenced as “utter nonsense”, after surprisingly strong growth in the wake of a government ban on high denomination bank notes caused raised eyebrows among independent analysts.

Speaking to an investment forum in Hong Kong on Wednesday, Arvind Subramanian said India was seeking to improve its methodology, and its data should not draw the same scepticism with which some analysts treat China’s economic data.

“Let me say this categorically to all the investors and I am not batting on behalf of the government here,” he told the annual Credit Suisse Asian Investment Conference in Hong Kong.

Many analysts were surprised that a slowdown in growth during the December quarter was not as bad as they had expected following Prime Minister Narendra Modi’s decision in November to outlaw 500 and 1,000 rupee banknotes in a radical move against tax avoidance and corruption in the cash-reliant economy.

The decision sucked 86 percent of cash out of circulation, and everyone from street hawkers to big consumer goods firms suffered a slump in sales.

With data on commercial vehicle output, rail freight, service tax receipts and home appliance sales showing slowing growth or contraction, economic expansion in the quarter to December was forecast by economists at 6.4 percent.

Instead, the official data showed the economy grew 7.0 percent, enough for India to retain the title of the world’s fastest growing major economy even though it was slower than the 7.4 percent growth posed for the September quarter.

Getting economic growth up to 8-10 percent is essential for job generation in India, Subramanian said, adding that boosting private sector investment remains a challenge.

He told the investor conference that there was a need for more direct investment in the manufacturing sector.

New Delhi’s GDP data has been questioned since a change in methodology in 2015 transformed India into the world’s fastest-growing major economy.

The government defended the overhaul, which occurred less than a year after Modi swept to power, citing an improved database covering hundreds of thousands of firms. Data reporting has long been a challenge in an economy where the informal sector accounts for 40 percent of output and employs nine in 10 workers. The IMF expects India to remain one of the fastest growing emerging market economies, forecasting 6.6 percent growth in the fiscal year ending on March 31, and 7.2 percent for the coming fiscal year. (Reporting by Saikat Chatterjee; Writing by Farah Master; Editing by Simon Cameron-Moore)