The case for accountable lottery regulation in India

GS-II – Governance | GS-III – Economy | Social Justice | Public Finance

Why in News?

• State fiscal stress: Amid persistent State fiscal stress, the widespread preference for prohibition deserves reconsideration.
• Legal framework: Government-organised lotteries fall under Entry 40 of the Union List.
• Lotteries (Regulation) Act, 1998: The Act permits States to organise lotteries subject to Section 4 conditions, while Sections 5 and 6 empower States and the Union Government, respectively, to prohibit lotteries that violate Sections 4 and 5.

Vices and Fiscal Revenue

• Fiscal value of vices: Different voices, one hard-headed insight: vices are fiscally invaluable.
• Prohibition: A prohibition may be morally appealing yet administratively futile — or, worse, positively counterproductive.
• United States: Following a sustained temperance campaign, it imposed prohibition through the Eighteenth Amendment and the Volstead Act, from 1920 to 1933.
• Black market: While suppressing legal supply, prohibition left demand intact, fuelling a lucrative black market controlled by violent syndicates such as Al Capone’s.
• Costs: Bootlegging corrupted public institutions, deprived governments of excise revenue and imposed heavy enforcement costs.
• Twenty-First Amendment: The Twenty-First Amendment repealed prohibition, recognising that a regulated and taxed market could cause fewer harms than an unenforceable ban.
• India: States in India that have experimented with prohibition have faced similar challenges.

The Argument for Regulation

• Poorer households: Lotteries disproportionately burden poorer households, encouraging them to stake scarce income on remote chances of reward.
• Compulsive play: Rapid draws and instant games can encourage compulsive play and loss-chasing, while giant jackpots distort risk perception.
• Other harms: Credit sales, opaque odds and manipulative advertising compound these harms.
• Regulation: These are powerful arguments for stringent regulation, not necessarily prohibition.
• Illegal markets: Lottery bans can push players towards smuggled tickets, matka, satta, single-digit rackets and offshore portals.
• Unaccountable operators: These enterprises lack audits and age restrictions, secure prize funds and effective remedies against fraud.
• Revenue and livelihoods: Governments lose lottery surpluses and GST revenue, while legitimate vendors, many of them poor or disabled, lose livelihoods and enforcement costs rise.
• Vulnerable sections: In seeking to protect the vulnerable, the state may instead leave them at the mercy of unaccountable operators.

State Paternalism and Adult Choice

• Class-neutrality: The state’s paternalism is not class-neutral.
• Financial markets: Financial markets are legal not because everyone acts wisely, but because risks are disclosed, intermediaries regulated and fraud punished, while adult choice is preserved.
• Lotteries: Lotteries can follow the same principle, with more stringent safeguards appropriate to games of chance.

International Norm

• Controlled legality: Across diverse political and economic systems, the norm is controlled legality, with lottery surpluses allocated transparently to education, health care, sports, welfare or infrastructure.
• Public-operator model: Nearly 70% of lottery jurisdictions follow the public-operator model, in which a government body, statutory authority or State-owned company runs the lottery while private firms provide retail and technology services.
• Concession model: Under the concession model, the State regulates the lottery but grants operating rights to a private concessionaire.
• Federal countries: Federal countries generally entrust lotteries to their constituent units while permitting voluntary cooperation across borders.
• Cross-border sales: Cross-border sales require the destination jurisdiction’s consent or participation in a cooperative arrangement.

Lotteries in India

• Nine States: A Lok Sabha reply of March 14, 2023, identified only nine States operating lotteries: Arunachal Pradesh, Goa, Keralam, Maharashtra, Mizoram, Nagaland, Punjab, Sikkim and West Bengal.
• Union List: Government-organised lotteries fall under Entry 40 of the Union List.
• Regulation: The Lotteries (Regulation) Act, 1998, permits States to organise lotteries subject to Section 4 conditions, while Sections 5 and 6 empower States and the Union Government, respectively, to prohibit lotteries that violate Sections 4 and 5.

Constitutional and Judicial Position

• Res extra commercium: Settled Supreme Court jurisprudence treats gambling, including State-organised lotteries, as res extra commercium, outside the protections of Articles 19(1)(g) — fundamental right to trade — and 301 — freedom of trade across India.
• Section 5: Section 5 of the Lotteries (Regulation) Act, 1998, reflects this principle by allowing States to prohibit outside lotteries.
• B.R. Enterprises: In B.R. Enterprises vs State of U.P. (1999), the Court read Section 5 down: a State may exclude other States’ lotteries only by abandoning its own and becoming wholly lottery-free.
• Regulatory disparity: While a State directly oversees its own lottery administration, its oversight of another State’s operations within its territory is necessarily indirect, even as it bears the local enforcement burden.
• Tamil Nadu and Karnataka: Faced with this revenue-regulation trade-off, Tamil Nadu (2003) and Karnataka (2007) chose total prohibition, thereby forfeiting the option of running accountable public lotteries of their own.

Two Necessary Amendments

• Section 5: Parliament should amend Section 5 to clarify that the provision applies “whether or not the prohibiting State organises a lottery of its own”.
• Destination-State consent: Destination-State consent should be decisive, subject to uniform treatment: a State must either admit all outside lotteries or exclude them all.
• Section 4A: A new Section 4A should authorise two or more States to establish a common lottery by agreement, pooling players, prizes, technology and costs, as in successful multi-State lotteries elsewhere.

Transparent Regulation

• Alternative to prohibition: Transparent regulation offers a more accountable alternative to prohibition.
• Section 4: Section 4 permits States to sell tickets directly or through distributors or agents.
• Departmental operation: Departmental operation can be more transparent and enable retail distribution through small vendors, persons with disabilities, women’s self-help groups and cooperatives, broadening livelihood opportunities and limiting intermediary capture.
• Kerala model: Kerala follows this model.

Way Forward

• Stringent regulation: These are powerful arguments for stringent regulation, not necessarily prohibition.
• Destination-State consent: Destination-State consent should be decisive, subject to uniform treatment.
• Section 4A: A new Section 4A should authorise two or more States to establish a common lottery by agreement, pooling players, prizes, technology and costs.
• Transparent regulation: Transparent regulation offers a more accountable alternative to prohibition.
• Departmental operation: Departmental operation can be more transparent and enable retail distribution through small vendors, persons with disabilities, women’s self-help groups and cooperatives.
• Public-operator model: Kerala’s public-operator model offers a useful, though not exclusive, template for reform.

Conclusion

• Regulation over prohibition: A prohibition may be morally appealing yet administratively futile — or, worse, positively counterproductive.
• Controlled legality: Across diverse political and economic systems, the norm is controlled legality, with lottery surpluses allocated transparently to education, health care, sports, welfare or infrastructure.
• Accountable lotteries: Kerala’s public-operator model offers a useful, though not exclusive, template for reform.

UPSC Mains Practice Question

Q. Discuss the regulation of lotteries in India in the context of social harms, fiscal revenue, constitutional provisions and the experience of States.