The policy environment for management of land-use in India has been quite mud-died. Part of the reason is lack of accountability among senior level public administrators, policy planners and various constituents of the existing institutions who decided not to complain even when institutions strayed away from their goals. In this paper, I argue for certain basic re-thinking in the policy options for viable watershed management by combing local knowledge with the formal science through rejuvenated or revitalized traditional institutions. In part one, I review the policy environment in the light of some of the recent reports in India which have a major bearing on watershed development programs. I argue that natural scientists have committed a fundamental error when they assumed that major challenge in watershed management was transfer of technology instead of development of technology on people's lands and in their neighborhoods. Given the ecological heterogeneity evident to soil scientists and people working in these regions, there was no way standard solutions could have been replicated over large areas. The need for action research in generating viable options through collaborative thinking is necessary. Various other weaknesses of the existing programs are identified in this section. In part two, I discuss the theory of portfolio options which can provide an effective alternative to the current approaches to watershed management. I also suggest that people's knowledge about biodiversity, historical land-use and various conservation measures needs to be supplemented with modern science and technology in an experimental manner so that limits of both the knowledge system – formal and informal become opportunities for innovation rather than constraints. In part three, I discuss various policy changes in research, public administration, decentralized system of self governance, and interface with voluntary organizations and people's institutions. I conclude that large scale efforts in restoration of productivity of eroded regions have to be appreciated without ignoring the fact that spreading resources thinly may give political advantage but would not generate any durable change in the resource management situation.