As we know, market failures manifesting in various forms such as monopolies, externalities, and information asymmetries not only diminish economic value but also erode societal well-being, which results in decline in the trust of users. It is precisely in these cases that government regulatory intervention becomes vital. The measure of adequacy in this context hinges on a simple criterion — the benefits of government intervention must surpass its potential costs. The benefits include safeguarding public interest and trust.
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Digital markets
Online services have become central to how most of us live our lives. With a staggering 692 million Internet users, India has the world’s second-largest Internet user base and ranks eighth globally in terms of time spent on mobile apps. The average daily mobile app usage has surged to 4.9 hours, a 32% increase since 2019. Notably, a significant 82% of usage is dedicated to media and entertainment with social media accounting for roughly half of this engagement. While this trend has generated significant benefits to people, it has also created new concerns. For instance, the Internet has been inundated with AI-generated deep fake videos of celebrities. These technologically advanced simulations have blurred the lines between what’s real and what’s not. Market failure in online services has taken new characteristics and complexities due to the intricate interplay of data and algorithms.
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The government is responding to these challenges by proposing new forms of digital regulation. Within this landscape, an important sector is online gaming where market failure is becoming evident and yet there is no adequate regulation.
The online gaming industry in India is predominantly a home-grown start-up ecosystem growing at 27% CAGR. It is widely estimated that AI and online gaming can add up to $300 billion to India’s GDP by 2026-27. But with great leaps come inherent pitfalls. Similar to other forms of digital media, the meteoric rise of online gaming has brought with it an array of concerns such as addiction, mental illness, suicides, financial frauds, privacy and data security concerns. Money laundering and national security concerns are other realities. The situation is further exacerbated by the growth of illegal offshore gambling and betting markets wherein the volume of digital transactions provides fertile ground for financial malpractices. In July 2023, the Parliamentary Standing Committee on Finance, of which I am a member, identified four major trends in cybercrime. Notably, one includes the use of international online betting sites for purposes such as money laundering.
These issues are symptomatic of a larger problem of market failure, arising primarily out of insufficient regulation. Consider, for instance, the safety and financial ramifications of illegal offshore betting and gambling markets. No mechanism exists for individuals to differentiate between legitimate gaming platforms and illegal gambling/betting sites. In addition, in the absence of a specialised regulatory authority, enforcement is lacking. As a result, the number of illegal operators is multiplying by the day. The illegal offshore gambling and betting market receives $100 billion per annum in deposits from India and has registered a growth rate of 20% in the past three years. Besides causing user harm, the clandestine and untraceable operations of these platforms are causing substantial losses to the exchequer. Estimates indicate that India lost $45 billion per annum in taxation due to operations of illegal offshore markets.
These challenges call for an urgent need for robust regulation of the online gaming industry. Some State governments attempt to ban online gaming. However, the inherent cross-border nature of the Internet makes enforcing such a ban almost impossible, leading to the unintended consequence of legitimate, regulated platforms being replaced by unregulated and potentially harmful ones.
In this context, the Information Technology (Intermediary Guidelines and Digital Media Ethics Code) Rules, 2021 marked a commendable step towards oversight. However, the delayed notification of Self-Regulatory Bodies has stalled the progress. To protect 373 million gamers in India, who are potentially at risk, it is imperative that the sector is strictly regulated.
The global perspective
The U.K. has a centralised government regulator. In order to track the efficiency of measures undertaken, this body publishes quarterly the effects of regulation in the sector. The recent reports have shown that since 2017, operators who fell afoul of player protection requirements have been subjected to significant multi-million-pound fines. This strict enforcement, coupled with targeted efforts aimed at harm reduction during 2018-22, has led to a decline in both disordered gaming and medium-to-low risk gaming behaviour.
An unregulated market may not deliver the greatest benefit to society overall. According to the International Monetary Fund, a combination of high taxes and a weak, discretionary approach to regulatory enforcement creates the most fertile ground for the proliferation of a shadow economy — an environment in which the Indian online gaming industry is operating. Therefore, establishing a strict regulatory framework is an urgent need, not just for protecting our digital nagriks and national interests, but also to ensure responsible growth of the online gaming sector.
Amar Patnaik is a Member of Parliament, Rajya Sabha, from Odisha, and an advocate by profession now. He is a former CAG bureaucrat. Views are personal. @Amar4Odisha
