Missing Fiscal Autonomy

Federal system is based on the principle that the political and legal autonomy of sub-national governments ensures recognition, opportunities, and economic benefits for the people. Under the unitary system, the centralised government is blamed for pursuing development in a lopsided manner. Its structure is supposed to be more bureaucratic, with procedural norms undermining locals' aspirations and participation in the decision-making and budget formulation processes that directly impact them. The adoption of federal dispensation through the 2015 constitution ushered in a new governance arrangement in Nepal, which was accustomed to unitary practices for centuries. It is based on self-rule and shared rule that stress the judicious allocation of resources in line with the needs and necessities at the grassroots. 

With the two election cycles, the elected officials have been governing the local and provincial bodies for around eight years. However, the federal experiment has a mixed bag: the local units and provinces have secured the constitutional rights and autonomy, but they are unable to explore local resources for self-reliance.  The tendency to depend on the federal government has even increased as the local and provincial governments have not developed the capacity and confidence to translate the given constitutional rights into tangible gains. The political instability and absence of vital laws have also attributed to their lacklustre performance, while the lack of political will and development vision are also equally responsible. 

A study shows that provinces are mainly managing resources from the sectors such as transportation, agriculture, natural resources, construction materials and house rent. As agriculture has been the main source of livelihood for the majority of people, it does not provide much income, though the commercial farming and agro-processing industries have the potential to augment resources for the provincial governments. But, there has not been effective tax collection from the construction material industries, such as collecting and distributing sand, gravel and stones. The base of the rental tax has not been properly expanded either. According to a news report of this daily, the motor vehicle tax contributes to 32.83 per cent of revenue, the largest share, followed by land and property registration fees (31.21 per cent) and business registration fees (18 per cent).

As per the analysis of the Federalism and Localisation Centre, internal revenue forms about 20 per cent share in the total income of the provinces. On the other hand, revenue sharing has increased to 54.58 per cent, and the share of federal grants has increased to 45.42 per cent. The fiscal performance of all seven provinces is not up to the mark. In 2023/24, only Koshi scored a pass mark - above 40 – but the remaining six failed. Madhes Province was at the bottom with 20.5. Karnali secured 25.9, Sudurpaschim 26.1, Lumbini 34.4, Bagmati 36.1 and Gandaki 38.5. Provincial governments have indulged in a spending spree to appease the constituencies of ruling party leaders instead of generating income.  This is a reason why they give a short shrift to the Medium-Term Expenditure Framework (MTEF), a mandatory three-year budget plan involving the resource forecasts, performance targets and expenditure strategies.

The elected officials are preoccupied more with the grant and revenue distribution, less with the tax expansion and reform strategies. They can focus on the house-rent tax, which is considered a viable source of income. Bagmati Province has significantly mobilised its internal revenues compared to other provinces. Now it is time for provinces to prove their mettle to stand on their own feet.