An official at the Finance Ministry confirmed that India made such request last week, and said that the ministry has sought opinions from other ministries on whether the agreement should be extended.

Nepal first signed the agreement with India on Small Development Project (SDP) in 2003. It has already been renewed thrice in 2006, 2008 and 2011. The initial agreement allowed the Indian Embassy to provide maximum of Rs 30 million which was revised to Rs 50 million in 2011.

This provision for Indian grants has been controversial as the funds are not channelled through the government’s budgetary system. Politically, it has been dubbed as an ‘instrument’ to wield Indian influence over local communities in Nepal.

China has also made a similar aid request to Nepal during bilateral talks, but the government has not acceded to the proposal, said the Finance Ministry official.

The Indian Embassy’s website calls SDP “hugely popular” in Nepal under which the development carried through the aid directly reaches the beneficiaries, and ensures direct involvement of stakeholders in the process. Indian assistance under this programme is spent on infrastructure development and capacity development in areas of education, health, and community development.

The embassy decides which project to fund based on the proposals submitted by the DDCs through the Ministry of Federal Affairs and Local Development.  

 “As India has the discretionary power to decide which project to fund, we have asked the Indian diplomats to revise the current system in our meetings,” said a senior official at the Local Development Ministry. “We have proposed that the project funding should be based on priority of the government, and individuals having connection with embassy should not influence the funding process.”

 The 51st annual report of the Office of the Auditor General (OAG) mentions that the Local Development Ministry has been releasing the aid received from the Indian Embassy under SDP to construct school buildings and roads without incorporating it in the annual budget. The Financial Working Procedure Act dictates that cash and goods received from friendly nations and international institutions should be incorporated in the annual budget.

The OAG report has called for stopping the practice of directly releasing foreign fund to DDCs, and instead channelling the amount through the government.  

Experts agree that the donors should follow the policy on foreign aid adopted by the recipient country.

“It’s better to bring Indian aid, just like any other, under the budgetary system and spend it on government’s priority areas,” said Shankar Sharma, former vice-chairman of the National Planning Commission.

Meanwhile, Finance Ministry officials have said that although the aid under the SDP is not incorporated in the budgetary process, the Indian Embassy has been seeking approval from the Finance Ministry to fund community-level projects.

The recently unveiled Development Cooperation Policy talks about mobilising foreign aid under the budgetary process.

Although the policy bars foreign grants below $50 million in general, it has kept the door open for small grants for rural infrastructure development.