The federal budget for the upcoming fiscal year has increased grants to provinces, while reducing allocations to local units compared to the current fiscal year.

The Constitution of Nepal provides for the federal government to allocate budgets to provinces under the headings of equalisation, conditional, complementary, and special grants, subject to certain conditions. It mandates fiscal transfers based on recommendations from the National Natural Resources and Fiscal Commission, subject to various criteria.

For the upcoming fiscal year, the federal government has projected mobilisation of more than Rs 600 billion at provincial and local governments. This amount is slightly higher than that of the ongoing fiscal year. Conditional grants to provinces have been increased by nearly Rs9.5 billion, while conditional grants to local governments have been reduced by Rs 1.38 billion.

Federal affairs expert Khimlal Devkota said the budget is not encouraging for implementing the rights of provinces and local governments. Referring to the budget's principles and priorities, which emphasise focusing the federal government on transformative projects, Devkota said the budget still reflects a structure in which the federal government intends to carry out all work itself. He remarked that no budget so far has truly understood the spirit of fiscal federalism.

Finance Minister Swarnim Wagle, presenting the 2026-27 budget in Parliament on Friday, allocated Rs 61.50 billion for provinces and Rs90.2 billion for local governments under fiscal equalisation grants for the fiscal year 2026-27, in line with the recommendations of the Fiscal Commission. In the current fiscal year, Rs 60.66 billion has been allocated for provinces and Rs88.97 billion for local governments under the same heading. Compared to last year, equalisation grants have increased by Rs840 million for provinces and Rs1.23 billion for local governments.

Only equalisation grants to local governments have been increased, while all other local-level grants have been reduced. Local governments have been demanding annual increases in equalisation grants, but significant growth has not materialised. Devkota said, “In the current fiscal year, the total equalisation grant to provinces and local governments accounted for 7.62 percent of the budget, whereas in today’s budget the ratio stands at 7.14 percent. Since fiscal year 2018-19, the proportion of this grant received by provinces and local governments has been gradually declining.”

For the upcoming fiscal year, the budget states that Rs4.60 billion will be provided to provinces and Rs8.93 billion to local governments as complementary grants for implementing infrastructure development projects. In the current fiscal year, the government has allocated Rs3.28 billion to provinces and Rs 10.06 billion to local governments under this heading. Compared with the current year, infrastructure grants for provinces have increased by Rs1.32 billion, while those for local governments have decreased by Rs 2.87 billion.

Similarly, the federal government will provide Rs 3.82 billion in special grants to provinces and Rs 9.40 billion to local governments in the upcoming fiscal year. Compared to the current fiscal year, special grants to provinces have increased by Rs 550 million, while allocations to local governments under this heading have decreased by Rs380 million. In the current fiscal year, the government has allocated Rs3.27 billion in special grants to provinces and Rs9.78 billion to local governments. Comparing the current and upcoming fiscal years, the budget for 753 local governments under special grants has decreased by Rs380 million.

Under conditional grants, the federal government has allocated Rs39.72 billion for provincial projects and Rs206.08 billion for local governments for the upcoming fiscal year. In the current fiscal year, allocations under this heading stood at Rs30.35 billion for provinces and Rs 211.46 billion for local governments. Conditional grants to provinces have increased by Rs9.37 billion, while allocations to local governments under this heading have been reduced by Rs 5.38 billion.

The government estimates that Rs 175 billion will be transferred to provinces and local governments through revenue sharing. In the current fiscal year, the estimated transfer under revenue sharing stood at Rs 165 billion. Compared to the current year, allocations under this heading have increased by Rs 10 billion.

The budget has set a target of mobilising more than Rs 600 billion at the provincial and local levels through revenue sharing, including royalties, and fiscal transfers in the upcoming fiscal year. In the current fiscal year, the government has targeted transfers worth Rs 582.83 billion to provinces and local governments through revenue sharing and grants. Finance Minister Wagle has projected mobilisation of more than Rs600 billion under revenue sharing and grants, although the exact figure has not been specified in the budget speech.

The budget speech also states that a policy will be introduced to transfer conditional grants to local governments to promote organic and green fertilisers. An allocation of Rs 360 million has been set aside for this purpose.