NNRFC Fiscal Transfers in Nepal: Equalisation, Conditional, Complementary & Special Grants

When Nepal adopted the Constitution of Nepal 2072 BS (2015 AD), it became a federal republic with three tiers of government: one federal government, 7 provinces (pradesh) and 753 local levels (gaunpalika, nagarpalika and their sub-metropolitan and metropolitan variants). Because most tax powers and buoyant revenue sources sit with the federal government, while much of the day-to-day spending on schools, roads, health posts and drinking water happens at the provincial and local levels, the Constitution built in a system of intergovernmental fiscal transfers to move money down the tiers. These transfers are the financial backbone of Nepali fiscal federalism.

The Constitution recognises exactly four types of grant (anudan) from the federal government to sub-national governments, and from provinces to local levels within their territory. These are the fiscal equalisation grant (vittiya samanikaran anudan), the conditional grant (sashart anudan), the complementary grant (samapurak anudan) and the special grant (bishesh anudan). Article 60 of the Constitution names these grants and directs that the equalisation grant be distributed on the basis of each unit's expenditure need and revenue capacity.

The detailed rules for how the four grants operate come from two 2074 BS (2017 AD) laws passed to operationalise federalism: the National Natural Resources and Fiscal Commission Act, 2074 and the Intergovernmental Fiscal Arrangement Act, 2074 (Antar-Sarkari Vitta Byawasthapan Ain). Together with the Constitution, they set the framework within which the NNRFC makes its annual grant recommendations. Understanding these four grants is a core civics and Loksewa (Public Service Commission) topic in Nepal.

The National Natural Resources and Fiscal Commission (NNRFC, Rastriya Prakritik Srot Tatha Vitta Aayog) is a constitutional commission created under Part 26 of the Constitution (Articles 250 and 251). It was established as a full commission in 2018 AD after the 2017 laws came into force, with the mandate of ensuring a fair and equitable distribution of natural and fiscal resources across the federal, provincial and local governments.

Under Article 250, the Commission consists of a Chairperson and up to four other members, appointed by the President on the recommendation of the Constitutional Council. Members serve a six-year term and must have at least twenty years of expertise in natural resources or fiscal management, economics, law or management, and must not be affiliated with any political party at the time of appointment. This independence is meant to insulate grant recommendations from short-term political pressure.

The NNRFC's core job is to recommend the bases and formulas for distributing revenue and grants among the three tiers. Under Article 251 and the two 2074 laws, it recommends: the detailed grounds for the fiscal equalisation and conditional grants; the division of revenue between the federal, provincial and local levels; the sharing of natural-resource royalties (such as from hydropower, mines and forests); and the ceiling on internal borrowing that each government may undertake. The federal Ministry of Finance and Parliament ultimately set the amounts in the annual budget (Red Book), but they are expected to follow the NNRFC's recommended principles, and Article 60(3) requires the transfer volume to be based on NNRFC advice.

The fiscal equalisation grant is the most important transfer and the one most searched for as 'samanikaran anudan'. It is unconditional, meaning the receiving province or local level can spend it on any of its own functions without the money being tied to a specific programme. Its purpose is to reduce the gap (samanikaran means 'equalisation') between the resources a unit can raise on its own and the money it needs to deliver a comparable standard of public services. Constitutionally, it must be distributed on the basis of expenditure need and revenue capacity.

The NNRFC builds the equalisation grant using a three-part structure: a minimum grant that guarantees every unit a floor amount, a formula-based grant that reflects relative need and capacity, and a performance-based grant that rewards better public financial management. The minimum grant share is split giving equal 50 percent weight to population and 50 percent to area, so that both populous and geographically large units are protected. The Commission has, in the past, fixed a minimum threshold of roughly Rs 1.2 billion per province and Rs 60 million per local level, reviewing these figures over time.

The formula portion is driven by indicators of expenditure need and disadvantage. In its published methodology the NNRFC has weighted, for provinces, about 60 percent to development-expenditure need, 15 percent to the multidimensional poverty index, 15 percent to the socio-economic discrimination (underdevelopment) index and 10 percent to the infrastructure development index. For local levels the weights have been set at roughly 70 percent expenditure need, 15 percent infrastructure index, 10 percent human poverty index and 5 percent socio-economic discrimination index. Related NNRFC documents also describe the equalisation calculation in terms of population, Human Development Index (HDI), a price index and revenue potential. Exact weights are revised periodically, so always check the current year's recommendation.

At a conceptual level, the equalisation grant answers a simple question for each of the 760 sub-national governments: how much more money does this unit need to fund a fair level of services than it can reasonably raise itself? The NNRFC estimates an 'expenditure need' for each unit and an 'expenditure capacity' (revenue potential), and the gap between them, scaled to the total pool of money the federal budget makes available, drives the formula-based portion of the grant.

The process runs in stages. First, the total equalisation envelope is fixed in the federal budget. Second, a minimum grant is carved out and distributed to guarantee each unit a floor, weighted equally by population and area. Third, the remaining formula-based pool is distributed according to the weighted need-and-capacity indicators described above. Fourth, a small performance-based slice is awarded on measures of budget discipline, transparency and financial reporting. The steps below summarise this in order.

In practice the quality of the equalisation grant depends heavily on data. The NNRFC has repeatedly flagged that gaps in disaggregated, up-to-date data at the province and local level force it to rely on proxies, which is one reason the exact indicators and weights have been refined across fiscal years. Readers preparing for exams should learn the concept (need minus capacity, plus a minimum floor and a performance top-up) rather than memorising a single year's percentages.

The conditional grant (sashart anudan) is money transferred for a specific, federally-defined purpose, such as running schools, health services or a named infrastructure programme. Unlike the equalisation grant it comes with spending conditions and federal supervision, and unspent or misspent balances can be clawed back. In rupee terms the conditional grant is often the single largest line of transfer in a given year, because it channels sectoral programmes (education, health, agriculture, roads) that the federal government wants delivered to a common national standard.

The complementary grant (samapurak anudan) is a matching or co-financing grant for capital and infrastructure projects, where the federal government and the receiving province or local level each contribute a share of the cost. The federal share is larger for poorer, less-developed units. Under the NNRFC's complementary-grant framework the federal-to-provincial cost-sharing ratio has been set higher for provinces such as Karnali and Sudurpashchim and lower for better-off Bagmati, and local levels are classified into groups that determine how much of a project the federal government will fund.

The special grant (bishesh anudan) is the most targeted. It supports specific projects and programmes that raise living standards, develop deprived regions and communities, or respond to disasters such as floods and earthquakes. The NNRFC has used a deprivation-index score (on a 0-to-1 scale, combining poverty, illiteracy, access to health, roads and electricity, remoteness, disaster vulnerability and HDI) to rank provinces, with Karnali scoring highest on deprivation and Bagmati lowest. Special grants are usually capped per project and time-bound, for example single-year programmes or multi-year infrastructure projects within set funding ranges.

Every year, before the federal budget is presented (traditionally on Jestha 15, around late May), the NNRFC submits its grant recommendations to the government. For fiscal year 2081/82 BS (2024/25 AD), for example, the NNRFC recommended a fiscal equalisation grant of about Rs 148 billion, split as roughly Rs 60 billion to the provinces and Rs 88 billion to the 753 local levels, sourced from the Federal Consolidated Fund. Within the provincial share it structured the money into a minimum grant, a formula-based grant and a performance-based grant, and it did the same for local levels.

These amounts and the underlying indicator weights are revised for each fiscal year, and they must be read alongside the conditional, complementary and special grants for the same year to see the full transfer picture. Because the figures change annually, this page states them with their fiscal year; for the exact current-year amounts and any updated methodology, consult the NNRFC's latest annual recommendation and the federal budget's Red Book. The direction of travel, however, is stable: equalisation and conditional grants dominate in value, while complementary and special grants are smaller, targeted instruments.

The system has faced criticism. Commentators note that the NNRFC has at times operated without a full complement of appointed members, that governments have occasionally departed from its recommended formulas, and that weak local data undermines precise equalisation. These debates are themselves part of the civics discussion around Nepali fiscal federalism and frequently appear in policy columns and exam questions.