The share of conditional grants is increasing compared to the equalization grants that the federal government transfers to provinces and local levels. Equalization grants are provided to these levels to implement programs they have independently selected. In contrast, conditional grants are allocated to implement federal programs.

Experts argue that increasing the portion of conditional grants in intergovernmental transfers, while equalization grants remain the same or decline, goes against the spirit of federalism. For the upcoming fiscal year (FY) 2025/26, the government has modestly increased the equalization grant, but the conditional grant has risen sharply.

In FY 2025/26, the federal government has allocated equalization grants of Rs 60.66 billion to provincial governments and Rs 88.96 billion to local governments. For the current FY 2024/25, these figures were Rs 60 billion and Rs 88 billion, respectively. The conditional grant to provinces has increased from Rs 25.85 billion in 2024/25 to Rs 30.35 billion for 2025/26. Similarly, the conditional grant to local governments has also risen from Rs 208 billion in the current fiscal year to Rs 211.45 billion in the upcoming year.

According to the Intergovernmental Fiscal Arrangement Act, 2017, the government is required to distribute fiscal equalization grants to provinces and local levels based on the recommendation of the National Natural Resources and Finance Commission, which assesses expenditure needs and revenue capacities.

Despite national policies calling for a reduction in conditional grants, their share continues to grow. Experts warn that this trend undermines local autonomy, as conditional grants restrict the ability of local governments to independently plan and prioritize their needs.

Juddha Bahadur Gurung, acting chairman of the National Natural Resources and Finance Commission, stated that, in principle, equalization grants should increase and conditional grants should decrease. However, he noted that this principle is not being practiced in Nepal. “Conditional grants are increasing, which has reduced the autonomy of local governments,” Gurung said. “As these grants grow, they hinder the process of local planning and reduce the financial capacity of local governments. This also suggests that more programs are being implemented in ways that contradict the principles of fiscal federalism.”

Equalization grants are intended to support development and infrastructure by addressing budget deficits at the municipal level. Gurung also pointed out that although the government introduces conditional grant programs to meet national standards and international commitments, the implementation still occurs at the municipal level.