There have been dramatic changes in the hydrology of many of the dry areas of South India in recent years as a result of increased groundwater-based irrigation, watershed development and land use change. Although intensive development of water resources has brought about huge benefits, its very success has thrown up new challenges. Demand and competition for water has increased to the extent that — in some areas — current levels of annual water use are so high that, in all but the wettest years, annual water use approximates towards annual replenishment of surface and ground water resources. In these areas, it is clear that the emphasis should switch from development to the management of water resources to ensure that water is allocated to activities with the highest economic and social value. Although current watershed development programmes bring a range of benefits, they may also change the temporal and spatial pattern of water availability and use. This can result in significant negative trade-offs such as more unreliable domestic water supplies in ‘downstream’ areas, particularly during low rainfall or drought years. As part of the Karnataka Watershed Development Project (KAWAD), a water resource audit assessed the status of water resources in the project watersheds and identified resource management practices that should be promoted by the project. This paper summarises the audit’s findings and recommendations, the main lessons learned and progress to date in implementing recommendations. For comparison, findings and recommendations from a water audit in southern Andhra Pradesh are also summarised.