Kapil Mahajan: Betting on profits

Legalised gambling could be a money-spinner for states

Gambling is one of the oldest industries in the world. In today's world, India stands ninth, by gross profits, in the list of the leading global betting and gaming nations. This is when lotteries (which account for the major share of gambling) are permitted in only 13 states, leaving a huge market untapped. Other than lotteries, gambling in India is limited to horse racing, whereas the subject includes gaming, wagering (betting) and lottery products.

Interestingly, the government allows betting on horse racing on the pretext of it being a matter of skill (a Supreme Court judgement in K R Lakshmanan and Others vs State of Tamil Nadu) but at the same time cricket betting is banned!

There is a paucity of reliable data on revenues/turnover in the gambling industry since much of the turnover is in the illegal market. Estimates suggest that the paper and online lottery markets are worth Rs 35,000 crore and Rs 1,000 crore, respectively. The annual turnover from horse racing is Rs 1,000 crore in India. But from "single-digit" lottery or patta games to betting on politics, the illegal market is large and varied.

In the recent Indo-Pak one-day cricket series, the stakes reportedly ran into hundreds of crores. The stakes on elections are estimated to be even higher, at about Rs 35,000-50,000 crore. Much of gambling in India, therefore, is in the illegal market.

The first and foremost benefit from legalising gambling will be revenue generation for states. The role of gambling in revenue generation is not new, even during Kautilya's era gambling was a state-regulated industry with a 5 per cent tax on winnings.

Lately many Indian states have realised the importance of the gambling industry. Calculations from an RBI report, "State Finances "" A study of Budget 2002-03", show that there is a tremendous increase in states' profits from lotteries. The aggregate losses of Rs 71.41 crore in 2000-01 turned into whopping profits of Rs 503.21 crore in 2002-03.

In the same year, the combined profit from state-run lotteries was 6.65 per cent of revenue receipts from the lotteries. The highest profit (in percentage terms) was for Meghalaya (93.96) followed by Mizoram (93.5), and the lowest was for Haryana (0.19) followed by Goa (1.58).

Interestingly, the figures suggest two extremes. The exorbitant profits of Meghalaya and Mizoram show the fleecing of lottery players (the odds are heavily skewed in favour of states) and the very low profits of Haryana and Goa show the inefficiency of states.

Lottery proceeds are divided roughly into winnings for players, administrative costs and beneficiaries (that is, states). In state lotteries in the US, the proportions are roughly 40-50 per cent as prize money, 15-20 per cent for operating costs and the balance for the beneficiaries/states.

So profits are very small in India (6.65 per cent) when compared to the US market (30-45 per cent). If the industry is properly organised, significant sums could accrue to states.

The second argument in favour of legalising gambling is that it provides choice for the consumer. Gambling is nothing but a consumer activity with some entertainment value. Service providers want to maximise their profits and compete with other industries to get a share of the consumer's disposable income. The consumer on the other hand see it as an activity satisfying his/her desires (for pastime and/or for making quick money).

However these benefits bring with them problems also. The first problem with gambling is when a person loses control over his/her gambling activities, resulting in financial losses that have an adverse impact on his/her personal, economic and social life.

The second has to do with the social repercussions that are a direct consequence of gambling. Some of the fallout could be increased crime, loan sharking (taking loans at exorbitant rates for gambling), worsening of the living standards of the poor and lower middle class, and changes in behavioural norms and social ethics.

As long as the benefits accrued from gambling outweigh the costs, there shouldn't be concern on the part of policy makers. But how does one measure the net benefits and costs? The benefits can be measured as the share of gambling's net proceeds that are earmarked for public goods; while the cost of gambling is the money spent on addressing the social costs.

To frame proper regulations and to enforce them, a strong regulator is a perquisite. In the UK, the Gaming Board for Great Britain is the regulatory body for casinos, bingo clubs, gaming machines and all local authority lotteries. India could constitute a regulator on the same lines as this will ensure transparency and fair play in the gambling industry and also address the social costs associated with gambling.

Initially, the primary focus of the regulator should be on key issues, like:

• Profit margins: As mentioned earlier, the margins from state lotteries in India are small by international standards. So the first step should be to improve profit margins, otherwise net revenues will not outweigh the social costs. What is required is a reasonable payout with the least possible administrative cost. Increased profit margins will result in increased revenue generation. But at the same time it should be constitutionally mandatory that gambling profits should be used for public goods (enhancing social welfare), otherwise all proceeds will go into the coffers of profligate states.
• Code of conduct in advertising: Today both states and their distributors promote lotteries aggressively. An online lottery, Dhan Dhana Dhan, is promoted with a catchline "Itna aasaan ki jeetne ki aadat pad jaye". This kind of promotion lures lakhs of people who do not have any idea of the payout ratio of prizes and forces them into the problem zone. It should be mandatory for gambling operators to disclose the probability of winning in advertisements.
• New products: The present product portfolio in the gambling market is limited. This could be extended to include betting exchanges, casinos and gaming machines. Betting exchanges facilitate transactions between people who have an appetite for risk and who want to bet on anything (with a clear outcome) under the sun.

It can be betting on sports, political outcomes or wars, films, weather or on celebrities. Transparency and counter-party guarantees will help bring the illegal market into the legal ambit. The use of a separate trading platform of the existing stock exchanges could be envisaged for this purpose. Casinos and gaming machines may also be introduced. This segment will primarily cater to the upper middle and rich class.

From all this, it should be quite clear that there is a huge potential for the gambling industry, though much of the market falls today in illegal territory. There are divergent views amongst policy makers on gambling. But today's laws address neither the economic nor the social costs. The development of a gambling industry in India requires a three-pronged strategy: reforming the existing gambling (that is, lottery) market and legalising the present illegal market (introducing new products), while introducing stringent and over-arching regulations.

The author is a research officer at Sebi. The views expressed are personal.