On March 5, the people of Nepal delivered a historic verdict that fundamentally reshaped the country’s political landscape. The Rastriya Swatantra Party (RSP), led by Rabi Lamichhane, secured a commanding supermajority, winning more than 5m proportional votes and 182 out of 275 seats in the House of Representatives. This 66 percent majority is more than a mere electoral landslide—it is a generational mandate for transparency, accountability, and accelerated economic progress. Under the Constitution of Nepal 2015, few mandates have been as decisive. The election results reflected a deep public desire to move beyond rhetoric toward a governance model defined by tangible outcomes. Citizens placed their confidence in a new generation of leaders who committed to building a ‘hardworking nation’. 

For Prime Minister Balendra Shah, this mandate provides both the legitimacy to lead boldly and the responsibility to implement reforms that reach every household. These insights may appear straightforward, yet they carry profound strategic significance for the nation.

A roadmap for reform

Within days of taking office, Prime Minister Shah introduced the ‘One Hundred Agendas for Governance Reform’, an ambitious framework structure around five strategic pillars:

• Governance and institutional integrity: Restructuring provincial council, anti-corruption, and digital governance
• Public service and accountability: Streamlining procurement and grievance handling,
• Economic transformation: Investment in energy, tourism, and trade
• Social development: Improvements in health, education, and agriculture
• Equity and social protection: Ensuring inclusion and a strengthened social safety net

At the absolute center of this agenda is fiscal federalism, the system governing how money is collected, shared, and spent across all tiers of government. Without a structural reform, the RSP’s broader agenda risks remaining aspirational rather than actionable. The ongoing debate over provincial councils has revealed itself to be both inefficient and unnecessarily costly. A more effective alternative would be to empower mayors, rural municipality chairs, and ward chairs to elect one provincial lawmaker from each district in respective province, thereby creating a streamlined body of 77 representatives. This approach would not only reduce electoral expenditures but also ease the administrative burdens, and enhance the efficacy of the provincial governments that plague the current council system. 

By adopting such a model, Nepal could establish an exemplary case of provincial council demonstrating that federal institutional reform can be both pragmatic and fiscally responsible.

The reality of fiscal imbalances

Data from the Financial Comptroller General Office highlights a widening gap between Nepal’s federal aspirations and its fiscal reality. In FY 2024/25, the federal government collected Rs 1.032trn in revenue, while provincial and local governments collected Rs 107.29bn and Rs 133.07bn, respectively. Although total revenue reached Rs 1.273trn, its distribution remains highly centralized. 

On the expenditure side, total spending reached Rs 1.844trn, with federal spending dominated by recurrent expenditure. Meanwhile provincial and local governments, the tiers closest to citizens, remain resource-constrained. This results two structural challenges:

• Vertical imbalance: The federal government dominates revenue collection, while provincial and local governments bear primary responsibility for service delivery. This mismatch forces provinces and local governments to rely heavily on federal fiscal transfers. Such dependency undermines autonomy and contradicts the principle of self-rule. Nepal has centralized fiscal power while decentralizing expenditure obligations, a paradox that weakens federalism.
• Horizontal imbalance: Significant disparities exist across provinces and municipalities. Wealthier federal policies benefit from larger populations, better infrastructure, and richer natural resources, while others lag behind. Over time, weak ‘own-source revenue’ generation has embedded a culture of dependency. Without corrective measures, fiscal federalism risks widening and deepening inequality rather than reducing it.

Unlocking new revenue sources

To break this fiscal dependency, the RSP government must promote scientific and sustainable use of natural resources to generate local wealth. This includes strengthening agricultural value chains, promoting non-timber forest products, tourism, entertainment, processing hub, digital center, and engaging in the global climate economy through initiatives such as biochar production and carbon markets. 

The federal government should also develop model revenue laws to support federal polity in exercising their constitutional taxation powers. These should cover agricultural income tax, property tax, vehicle tax, and land registration fees, etc. Standardization will reduce legal ambiguity and improve compliance. Additionally, local governments should establish dedicated revenue units, supported by modern IT infrastructures, to enhance financial management, tax administration, data generation and evaluation.

Expanding non-tax revenues and environmental levies

A sustainable fiscal architect cannot rely solely on taxation. Nepal must expand non-tax revenue from forests, water resources, minerals, and public enterprises dividends. The National Natural Resources and Fiscal Commission (NNRFC) should lead this effort through scientific and transparent resource-sharing frameworks. The introduction of environmental levies, such as carbon taxes, pollution charges and congestion fees, can align fiscal policy with environmental sustainability while generating additional revenue. 

Similarly, revenue from riverbed materials, such as sand, stones, boulders, pebbles, soils and minerals, etc., should be systematically integrated into local budgets. Categorizing these into short- and medium-term revenue streams will improve fiscal planning and service delivery.

Reforming intergovernmental transfers

Fiscal transfers are the lifeblood of federalism, ensuring that resources align with responsibilities. However, Nepal’s current system still reflects ‘unitary mindset’ within the bureaucracy in the Singhdurbar, where transfers are treated as discretionary support rather than constitutional entitlements. The NNRFC must be strengthened into a technically capacity, research-driven institution rather than a ‘bureaucratic parking spot’. This requires multidisciplinary expertise including economists, engineers, data analysts, geographers, regional planners, and social scientists to develop evidence-based allocation formulas. These formulas should consider population, geography, development indicators, human development and fiscal performance. Additionally, a Grievance Redressal Mechanism should be established to address intergovernmental fiscal disputes efficiently and transparently.

The path to effective governance

Nepal’s transition toward genuine federalism requires a shift from central patronage to federal polity empowerment. The 2026/27 budget must move beyond short-term transfers (grants) and enable federal polity to achieve fiscal sustainability. Fiscal federalism is not merely a technical reform; it is essential for translating public investment into tangible improvements in people’s lives. By prioritizing transparency, accountability and measurable outcomes, the RSP government can fulfill the promise of federalism.  

Nepal stands at a critical crossroads. The public has rejected the status quo and entrusted a new generation of leaders with a decisive mandate. They expect results, not rhetoric.  If fiscal federalism is reformed to be efficient, equitable, and citizen-focused, it can drive inclusive prosperity. If not, structural weaknesses will persist, and public trust will erode. Federalism was achieved through immense sacrifice. Allowing it to deteriorate into a mere bureaucratic formality would undermine that achievement. The RSP government must deliver tangible results ensuring that the progress is measured not in slogans, but in improved livelihoods and prosperity.