The final size and function of the adult central nervous system (CNS) are determined by neuronal lineages generated by neural stem cells (NSCs) in the developing brain. In Drosophila, NSCs called neuroblasts (NBs) reside within a specialised microenvironment called the glial niche. Here, we explore non-autonomous glial regulation of NB proliferation. We show that lipid droplets (LDs) which reside within the glial niche are closely associated with the signalling molecule Hedgehog (Hh). Under physiological conditions, cortex glial Hh is autonomously required to sustain niche chamber formation. Upon FGF-mediated cortex glial overgrowth, glial Hh non-autonomously activates Hh signalling in the NBs, which in turn disrupts NB cell cycle progression and its ability to produce neurons. Glial Hh's ability to signal to NB is further modulated by lipid storage regulator lipid storage droplet-2 (Lsd-2) and de novo lipogenesis gene fatty acid synthase 1 (Fasn1). Together, our data suggest that glial-derived Hh modified by lipid metabolism mechanisms can affect the neighbouring NB's ability to proliferate and produce neurons.