India could emerge as Asia`s strongest economy in 2022-2023 as it is best-positioned to generate robust domestic demand, helped by economic policy reforms, a young workforce and business investments, Morgan Stanley economists said.

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The brokerage expects India`s growth to average 7% for 2022-2023 and contribute 28% and 22% to Asian and global growth, respectively.

Morgan Stanley`s projection comes as Asia`s third-largest economy grew 9.2% in the fiscal year 2022, a sharp recovery from a 6.6% contraction in the previous year as COVID-19 lockdowns took a severe toll on its economy. The country now expects GDP growth for 2022-2023 at 8%-8.5%.

"Lower corporate taxes, the production-linked incentive (PLI) scheme and India as a potential beneficiary of supply chain diversification will catalyse and sustain domestic demand, especially in investment," the economists said in a note dated Tuesday.

In 2019, India had cut corporate tax rates to woo manufacturers and revive private investment, and launched the PLI scheme in 2020 to aid domestic manufacturing.

The brokerage sees risks related to higher energy prices, spurred by the Ukraine war and supply constraints, to remain, but added that they have begun to recede.

Morgan Stanley`s outlook also comes as developed economies paint a glum picture, with business activity in the United States and eurozone contracting in July, as per their PMI data.

"The economy is set for its best run in over a decade as pent-up demand is being unleashed," the brokerage said, adding that "healthy" corporate balance sheets and business confidence bodes well for India`s investment outlook.

While India, like other economies, raised interest rates to battle inflation, Morgan Stanley said the country`s 39.45 trillion rupee ($529.7 billion) budget for the current fiscal year has continued to tilt towards lifting public investment.

It expects domestic consumption to pick up and services exports to hold up better than goods exports.