Keralites' lottery addiction could spoil their financial future4 min read . Updated: 10 Sep 2020, 10:53 PM IST
A disciplined process of asset allocation and patience can surely do the trick
Afirm’s capital structure broadly comprises two asset classes—debt, where the firm promises to pay a fixed interest, and equity, where the firm offers ownership in its company and pays its investors in dividends and share appreciation. While both these asset classes appeal to different risk appetites of savers, choosing from various debt and equity offerings requires patience and involves both skill and luck.
However, there appears to be another form of capital structure, which has funded wars and floods. This form of raising capital requires neither a fixed interest (in fact most savers lose their capital, let alone get any interest), nor does it involve offering any ownership of the firm. While most savers lose capital, there may be a windfall gain for a few, entirely attributed to luck. Most importantly, for the lucky saver, the gratification is instant. We are talking of lotteries run by various governments, the most notable being Kerala State Lotteries, which was nationalized in 1967.
It is fascinating to reflect on the choice of savers in Kerala between the various asset classes. Consider this, in FY18, Kerala households saved approximately ₹17,000 crore in fixed deposits, non-resident Keralites also saved approximately ₹17,500 crore. Contrast this to the Keralites’ obsession for lotteries. In the last fiscal year, households in Kerala have spent close to ₹12,000 crore on lotteries. For many, especially at the bottom of the pyramid, a lottery appears a way out of their current miseries. The fact that the draws are made only on luck (without any scope for manipulation or gaming) and the results are near instantaneous add to the allure of lotteries. Over 79 million lottery tickets are sold every week in the state which has a population of 33 million. There are close to eight million households in Kerala, which means in a year, an average household buys about 500 lottery tickets. Households now spend around ₹15,000 per year on lotteries, not a small sum by any imagination. To contrast, last fiscal year, Keralites spent approximately ₹8,000 crore on medicines.
In some sense, the purchase of lottery ticket appears like an option premium—paying ₹30-40 per ticket for a possibility of earning, say, ₹50 lakh post-tax—payoff, if one gets incredibly lucky, that is significantly large. However, the odds of the payoff materializing are truly one in a million.
Even as Kerala was one of the first states to nationalize lotteries in 1967, the growth has been phenomenal in the last 10 years. In this period, Keralites’ spend on lotteries has grown 20 times from ₹625 crore to ₹12,000 crore. The profits of Kerala Lotteries have also kept pace—from approximately ₹100 crore in FY11, according to Keralalotteries.com, to my guestimate ₹2,500 crore last year (data available till FY18 only). At this scale of profits, Kerala Lotteries would be among the top 50 profitable listed firms in India. For every ticket, the distribution margin is close to 20%-plus for lakhs of lottery vendors across the state.In the wake of natural disasters like floods, the Kerala government introduced new lottery schemes which provided resources during difficult times. There are even charity lotteries where income generated is exclusively meant to provide financial assistance to poor people.
The state’s share of non-tax revenue from the sale of state lotteries has increased to 80.5% in FY17 from 38% in FY01 and 13.4% in FY1981. Given the continued surge in the sale of lotteries (FY17 revenues of Kerala Lotteries was ₹7,400 crore), the share of lotteries for state finances must have gone up further. While there is no record I could find of the total prize money disbursed in a year, the distribution margins to the trade, the super-normal profit margins and taxes paid to the exchequer all point that akin to a casino, the house clearly wins. If it was listed, such a regulated monopoly with such super-charged growth, super-normal profit margins and no requirement for capital for growth would have propelled it to one of the most valued firms in India.
If we contrast this with another avenue of financial savings, equity mutual funds in Kerala have seen a net inflow of approximately ₹1,500 crore last year, according to our internal data. While payoffs in equities in the near-term vary widely, we have seen that in the last 20-25 years, the prospects of significant wealth creation move up materially as the holding horizon moves beyond 10 years.
All kinds of risk-return financial products are needed, across the investment horizon for a saver. We all like to feel lucky, but a financial plan can’t be based on only luck. Instant gratification through lotteries can work for one in a million, but for most, a disciplined process of asset allocation and patience can do the trick.
Data cited in this article is from various media articles, and is used more to bring out a perspective rather than claiming to be an accurate source of various industry data-points.
Harish Krishnan is executive vice-president and senior fund manager, equities, Kotak Mutual Fund