31 March, 2007

Three percent of GDP

After reading my piece, ”Don’t Punish Victimless Crimes,” and the follow-up post to it, my friend Devangshu Datta was kind enough to send me an old article of his on legalising betting. It’s a wonderful piece, and was first published in Business Standard, though they don’t have it online anywhere. With Devangshu’s permission, I’m reproducing some paras below the fold. Note that it was written in January 2001, but though the absolute numbers would have changed, the arguments and the macro percentages probably remain valid:

According to the Delhi Police during Cronjegate, Rs 10,000 crore is bet on every Indian ODI. Since India plays between 30-40 ODIs annually, that’s equivalent to 15-20 per cent of GDP, or there’s phenomenal velocity. If that money came under the tax net as normal short-term capital gains, revenue collections rise by 3 per cent of GDP instantly. This almost doubles collections.

The imposition of tax would not cause volume loss. Many non-tax barriers inhibit the unlicensed industry. Of necessity, the illegal bookie keeps minimum bets high (usually Rs 5-10K/ bet) since he dare not use normal marketing and distributional channels to service clients. He also has enormous “off-balance” costs such as bribing law enforcement officials to contend with.

Give the illegal bookie a license, impose net worth considerations as in any other financially leveraged business and let him operate openly. You’ll know what his take-home will be, he is taxeable directly at source as in the case of lottery agents and turf clubs. The industry will instantly develop positive synergies with advertising/ media / marketing and event management. It will also result in an automatic allocation of money to sports as cash flows back.

Intelligently applied, once could soon create quasi-futures markets for uncertainties using gambling instincts. Get people to bet on the monsoon, on sugar, cotton and jute crop production levels and you’ve even got a classic hedging mechanism in place.

Even with a tax-differential payout, the licensed bookie will drive the unlicensed out of business. The legal bookie’s payouts are guaranteed, he doesn’t have a problem servicing small bets and he has far lower “off-balance” overheads. After a few years of raking it in, he will be a pillar of society. His children will be studying in the best schools. In the meantime, you’ve taken care of the revenue deficit during this fiscal and the next.

Devangshu adds in a follow-up email:

The other thing is, of course, [there are] pre-commodity futures exchanges which do allow “betting” on sugar and wheat, etc (except that the govt bans specific commodities in a random and arbit way every so often) . We don’t have a weather exchange unfortunately.