The fund will enable states to take up social and physical infrastructure programmes in the poorest and most backward districts. Originally announced in Budget 2004-05, the programme is set to take off in the next fiscal year.

For the first two years, however, the ongoing Rashtriya Sam Vikas Yojana will continue along with the new programme.

In 2007-08, districts that do not qualify as the poorest and most backward will be dropped from the programme. At present, the Rashtriya Sam Vikas Yojana covers 150 districts. 

"There are only 65 districts that are common to the Rashtriya Sam Vikas Yojana and the new list drawn up for the backward states fund," said an official. For the first two years, the programme will cater to 235 districts.

However, the guidelines for the use of the funds have not yet been finalised. They will be framed after the inter-ministerial group, considering the issue, finalised its report, the official added. 

In the 2004-05 Budget, Finance Minister P Chidambaram had said the government would set up a Backward States Grant Fund with a corpus of Rs 25,000 crore (Rs 250 billion) to be provided over a period of five years.

While the existing backward districts scheme, with an annual outlay of about Rs 1,800 crore (Rs 18 billion), was to be merged with this fund, the balance amount required for the annual contribution of Rs 5,000 crore was to be earmarked from out of the total central support to the plan, he had said. 

The creation of the BSGF is in line with the National Common Minimum Programme, which envisages the setting up of a Backward States Grant Commission to be used for creating productive assets in such states.

It also envisages that all non-statutory resource transfers from the Centre will be weighed in favour of poor and backward states.