Much of the debate on the relevance of Nepal’s provincial tier has focused on costs. However, the decision to establish provinces was never merely an economic or administrative one. It was fundamentally a political and constitutional response to Nepal’s long struggle for inclusion, representation and regional autonomy. The demand dates back to the establishment of the Nepal Tarai Congress in 1951. These movements ultimately shaped the federal structure enshrined in the 2015 Constitution.

Federalism, however, was intended to achieve more than political inclusion. It sought to constitutionally decentralise public authority, fiscal resources, planning and investment so that economic opportunities would spread beyond the Kathmandu Valley. Provinces should, therefore, be judged not only by political debates, but also by empirical evidence. Have Nepal’s development indicators improved during the federal era? While this alone cannot establish direct causation, it helps assess whether Nepal’s development trajectory has strengthened since federalism was implemented.

As political scientist Daniel Elazar described, federalism combines self-rule with shared rule, meaning provincial governments are constitutionally empowered entities rather than federal subordinates. Ronald Watts, a leading scholar of comparative federalism, noted that federalism brings governance closer to citizens to better reflect local priorities, while professor Wallace Oates explained that subnational governments deliver public services more efficiently due to superior local knowledge. Together, these frameworks show that provinces are meant to strengthen democracy, improve service delivery and foster long-term development. The central question remains whether this holds up in Nepal’s case.

To examine this, I compared key macroeconomic and fiscal indicators before and after provincial governments became operational, utilising data from the IMF’s World Economic Outlook Database (2024). To prevent distortion from extraordinary shocks, the earthquake years (2015-16), the transition year (2017) and the Covid-19 pandemic years (2020-21) were excluded. The analysis thus covers two stable periods: 2010-14 (pre-federal) and 2018-19 combined with 2022-24 (post-federal).

While weighted averages provide greater precision, simple arithmetic averages were used due to data limitations across all indicators. This descriptive approach offers transparency, though it should not be treated as a formal econometric assessment. The findings are encouraging. Every indicator moved positively during the post-federal period. Average annual real GDP growth rose from 4.49 percent to 5.0 percent, suggesting a stronger growth trajectory during comparable non-crisis years.

Recent fiscal data directly reinforces this transition. According to the Financial Comptroller General Office’s 2024-25 financial report across all three government tiers, capital spending accounts for 61 percent of total provincial expenditure compared to just 15 percent for the federal government and 35 percent at the local level. Although the provincial fiscal purse remains relatively small, this stark contrast underscores their primary focus on development and infrastructure investment. Taken together, these metrics confirm that Nepal achieved stronger macroeconomic and fiscal performance alongside provincial operations. At minimum, the evidence shows that federalism has coincided with an era of enhanced national development rather than economic stagnation.

While the national economic picture is encouraging, the regional reality remains mixed. A primary objective of federalism is not merely boosting aggregate national income, but distributing economic opportunities more equitably across provinces. In a mature federal system, subnational units should gradually emerge as self-sustaining centres of production, investment and employment rather than remaining peripheral to a single dominant metropolis.

Measured against this benchmark, progress has been slower than anticipated. According to the National Statistics Office’s recent GDP data set, Bagmati Province remains Nepal’s primary economic hub, accounting for 36.71 percent of national GDP. Though down marginally from 37.03 percent in 2018-19, this persistent concentration shows that nearly eight years of federal governance have yielded only a modest shift in regional economic balance.

There are, nevertheless, encouraging signs of dispersion. Gandaki (8.87percent to 8.98 percent), Lumbini (14.15 percent to 14.19 percent), Karnali (3.98 percent to 4.20 percent) and Sudurpashchim (6.86 percent to 7.03 percent)—each recorded slight gains in their national GDP share between 2018-19 and 2025-26. While small, these gains indicate that economic activity is slowly branching beyond the traditional capital core.

Contrarily, Koshi (15.81 percent to 15.80 percent) and Madhesh (13.30 percent to 13.08 percent) experienced a slight decline over the same period. The stagnation in Madhesh is particularly notable. Given its fertile agricultural plains, industrial clusters, proximity to the Indian border and central role in the political movement for federalism, Madhesh was widely expected to become a primary engine of regional growth. Its sluggish share suggests its full economic potential remains untapped.

Provincial fiscal space remains severely constrained. In Fiscal Year 2026-27, the combined budget of all seven provincial governments totals roughly Rs300 billion—a sum rivalled by single federal ministries, such as the Ministry of Infrastructure Development (approximately Rs310 billion). This stark imbalance underscores that despite constitutional devolution, development capital remains overwhelmingly centralised. Without expanded fiscal and administrative autonomy, provinces will struggle to meet their constitutional mandates.

While political debates often dominate discussions on federalism, its success ultimately hinges on economic outcomes. The evidence suggests that Nepal’s federal transition has coincided with stronger growth, higher capital investment and expanded fiscal capacity. Though provinces are not solely responsible for these gains, their focus on capital spending has strengthened state capacity at the grassroots level.

However, the economic promise of federalism remains partially unfulfilled. Economic activity remains heavily concentrated in Bagmati Province, while other provinces have made only modest gains. Moving forward, the core challenge facing Nepal is not whether provinces should exist, but how to transform them into powerful engines of regional development.

If the first decade of federalism was defined by constitutional setup and political devolution, the next must centre on economic federalism. This requires strengthening provincial economies, expanding their fiscal space, enacting delayed federal legislation, attracting regional investment and narrowing inter-provincial disparities.

Unlocking these potential demands stronger collaboration between provincial administrations and the private sector. Subnational governments must foster investment-friendly environments, while businesses need to look beyond the Kathmandu Valley, towards emerging regional markets. Simultaneously, national public investment and institutions must be strategically decentralised across the provinces to accelerate balanced growth.