Look no further than Nomura’s India equity fund going gangbusters, (more than quadrupling to $3.8 billion in the past year). Or Japanese punters amassing a record $13 billion of Indian bonds and stocks as of the end of June, a haul that increased further in July.

It’s not hard to understand why. Asia’s No. 3 economy boasts much of what Japan lacks: a young, growing population; a swelling middle class; gross domestic product expanding roughly seven times faster; and, most importantly, a leader engineering a profound transformation in the India-growth narrative.

Prime Minister Narendra Modi, as Japan investors are noticing, has put far more reform wins on the scoreboard than their own leader, Shinzo Abe. Nearly five years on, the best Abenomics has achieved is aggressive monetary easing, a couple of corporate governance tweaks and highlighting the plight of an underutilized female workforce. That’s why deflation remains, wages have barely budged, interest rates are zero and Japanese investors are looking to harness the Modinomics boom.

But is Abenomics a bit late to the Modinomics party? The bulls, of course, are still stampeding across Dalal Street and pushing the S&P BSE Sensex index and price-to-earnings ratios to record levels. Investors are responding to Modi’s opening of sectors like aviation, defence and insurance, passage of a national goods and services tax (GST) and his strongman approach to reining in New Delhi’s notorious bureaucracy.

Markets may be outpacing Modi’s successes, though. Modi, is demurring on the most vital reforms needed to sustain the 7.7% GDP growth the International Monetary Fund expects this year: changes to land, labour and national tax laws, a banking system in turmoil and basic institutional competence.

The importance of this last challenge deserves far more attention. The rollout of GST on 1 July was as chaotic as it gets. The same goes for Modi’s 8 November “demonetisation" shock. Moving boldly to pounce on “black money" starving New Delhi’s coffers of revenue was the stuff of genius. The botched implementation of yanking Rs500 and Rs1,000 notes from circulation, not so much. The fallout resulted in a few dozen deaths, lopped nearly 2 percentage points off GDP and smacked of amateur hour in New Delhi.

The risk of reform fatigue also bears watching. Perhaps some of Donald Trump’s permanent-campaigning ethos rubbed off on Modi during that White House bear hug last month. Already, there’s talk of the really big reforms being shelved ahead of the 2019 election, so as not to irk vested interests. That’s likely to put the onus on the Reserve Bank of India (RBI) to support growth as short-termism returns and Modi tinkers with small, politically advantageous tweaks.

Such drift is a clear and present danger to a banking system drowning in bad loans. That’s one of the more paradoxical aspects of Japanese investors rushing India’s way. Japan’s $4.8 trillion economy is still grappling with the fallout from its 1990s bad-loan crisis. India might not be cascading toward a financial meltdown, but a recent Moody’s Investors Service poll of Hong Kong investors highlights the risk. Seventy per cent of those Moody’s polled fingered India’s banking system as the biggest threat to South Asian and South-East Asian stability.

State-run lenders are especially fragile as bad debts climb to a 15-year high. As we learned from Japan in the 1990s and China today, “official" dodgy loan estimates are always optimistic and deliberately opaque. So when Mumbai markets buzz about $191 billion of zombie debt eating away at banks, investors must remember that, odds are, the true level is exponentially higher.

Thanks to Modi’s handiwork, India’s status as a “consensus trade" everyone wants in on is well deserved. But as we learned from Japan in 1990, South-East Asia in 1997, Wall Street in 2008, Europe in 2011 and China today, the banking system is the heart of any economic body. Troubles there lead to side-effects everywhere else—from misallocation of credit to bull markets in unproductive investments to rampant corruption to misplaced political priorities to prolonged deflationary funks. India’s vast potential rests on a shaky foundation that the government isn’t working fast enough to repair.

Leaving this to RBI might not be the best option. In May, the government gave the central bank new powers to rein in bad loans, part of Modi’s plan to revive credit growth from two-decade lows. But India’s problem isn’t the availability of credit—it’s the culture, priorities and safeguards with which it’s being allocated. Regulators should police banks more assertively. Modi also should create a mechanism to dispose of distressed assets, perhaps one modelled after America’s Resolution Trust Corp. from the 1980s.

If any group of investors should recall the traumas of the 1980s, it’s Japan. India’s troubles don’t mean a Japan-like meltdown and lost decade are assured. But it does raise questions about whether Japanese investors are too bullish on reforms that Modinomics may not pull off.

William Pesek, based in Tokyo, is a former columnist for Barron’s and Bloomberg and author of Japanization: What the World Can Learn from Japan’s Lost Decades.

His Twitter handle is @williampesek

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