Revenue to GDP Ratio Below 20% – Challenges for Fiscal Space

Published on September 24, 2025

Nepal’s fiscal position is increasingly constrained as the revenue-to-GDP ratio has fallen below 20% in FY 2024/25, reaching just 19.6%, compared to 22.4% in both FY 2020/21 and 2021/22. The ratio had already dipped to 18.8% in FY 2022/23, reflecting persistent weaknesses in revenue mobilization. A revenue-to-GDP ratio below 20% is considered low for a developing economy like Nepal, where fiscal needs are high due to demands for infrastructure, public services, and social protection.

The decline underscores Nepal’s overdependence on trade-related taxes. Customs duties, VAT, and excise from imports continue to form the bulk of government revenue, leaving the fiscal system vulnerable to fluctuations in import demand. As imports contracted in FY 2022/23 and grew only modestly afterward, revenue collection weakened. Domestic sources of taxation, such as income tax, property tax, and compliance-driven broadening of the tax net, remain underdeveloped, making revenue growth volatile.

Falling revenue relative to GDP directly constrains fiscal space—the government’s ability to fund capital projects, respond to economic shocks, and manage debt without compromising stability. This is particularly concerning as Nepal’s capital expenditure remains stuck at just 3–4% of GDP, far below what is needed to support growth and employment. Meanwhile, recurrent expenditure, such as salaries, pensions, and interest payments, consumes most of the budget, leaving little flexibility for development priorities.

The imbalance is further stressed by rising public debt. With domestic debt at 20.8% of GDP and external debt at 22.9%, Nepal is borrowing heavily to cover fiscal gaps. But unless revenue collection improves, reliance on debt will continue to grow, risking sustainability and crowding out private sector financing.

Strengthening fiscal space requires urgent reforms: broadening the tax base, improving compliance, enhancing efficiency in tax administration, and diversifying beyond trade-based taxation. In the long term, linking fiscal policy with structural economic reforms—such as industrial growth, formalization of the labor market, and expansion of service sectors—will be critical to stabilizing the revenue-to-GDP ratio above 20%.

Policy Lessons from India: Can Nepal Control Inflation More Effectively?

India has kept inflation relatively moderate through strong agricultural systems, buffer stocks, and inflation-targeting policies, while Nepal has historically struggled with food-driven volatility. Nepal’s CPI fell below India’s in 2025/26 for the first time in four years, but to sustain this trend, Nepal must strengthen supply chains, adopt buffer policies, and set clearer inflation targets.

Inflation Convergence in South Asia: What Nepal-India CPI Data Reveals

Nepal and India’s inflation rates, once far apart, have gradually converged—Nepal’s CPI dropping from 7.74% in 2022/23 to 1.68% in 2025/26, while India’s remained steadier around 2–5%. For the first time in four years, Nepal’s inflation fell below India’s, highlighting both shared regional cycles and unique domestic vulnerabilities.

Nepal vs India: Monthly CPI Comparison and Regional Economic Impact

Nepal’s inflation fell to 1.68% in August 2025/26, below India’s 2.07%, reversing a four-year trend. While both economies share similar seasonal inflation cycles, Nepal’s sharper food-driven spikes contrast with India’s steadier, monsoon-driven patterns. Regionally, this convergence impacts household costs, trade competitiveness, and economic stability.

Inflation Gap Narrows: Nepal’s Deviation with India Falls to -0.39% in 2025/26

In August 2025/26, Nepal’s CPI stood at 1.68%, lower than India’s 2.07%, with the inflation deviation dropping to -0.39% for the first time in four years. While Nepal gained from falling food prices, India’s inflation stayed higher due to agricultural pressures, though both countries continue to face rising service costs.

Cross-Border Inflation Trends: How Nepal and India’s Prices Move Together and Apart

Nepal and India’s inflation trends usually move in sync, reflecting shared regional and global factors. But in August 2025/26, Nepal’s inflation (1.68%) fell below India’s (2.07%) for the first time in four years, thanks to easing food prices in Nepal, while India faced higher agricultural pressures.

Nepal vs India Inflation 2025/26: Why Nepal’s CPI Fell Below India’s for the First Time

In August 2025/26, Nepal’s inflation dropped to 1.68%, falling below India’s 2.07% for the first time in four years. While food price declines drove Nepal’s slowdown, India’s inflation held slightly higher due to agricultural pressures. However, Nepal’s service costs remain a long-term challenge, even as headline CPI looks favorable.