"The test of whether the UK should continue to give aid to India is whether that aid makes a distinct, value-added contribution to poverty reduction which would not otherwise happen," said Malcolm Bruce, the chairman of the parliamentary committee on international development.
The panel said that the aid should directed more at improving sanitation, challenging social exclusion and tackling under-nutrition.
The panel noted that more than 400 million people still live on less than USD 1.25 a day in India and British funds can still make a difference.
There has been debate in Britain about whether it should maintain aid to booming India when the government is forced to cut spending at home.
The Indian government currently invests "significant funds" in social programmes for the poor, but Bruce warned that "the poverty there is on such an extreme scale that it will take many years for India to achieve internationally agreed Millennium Development Goals."