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Like many areas of the world, the Varada River Basin in India's state of Karnataka is faced with increased demand for domestic and agricultural water use. Agricultural activities in the area are predominantly controlled by the monsoon rains from June to September, when three fourths of the area's annual rainfall occurs. For the rest of the year, water resources are relatively scarce, prompting the Karnataka state government to initiate a watershed development program, Jal Nirmal, with assistance from the World Bank. As part of these development efforts, the authors formulated a model based on linear programming that optimizes allocation of river water and groundwater subjected to stream flow and hydraulic constraints. Anticipating increases in water demand, the model includes policy scenarios that check future sustainability of the system. Conjunctive-use policy presented in this article is a new initiative in efficient use of water resources for regions that experience scarcity or uneven distribution of water resources. Includes 17 references, tables, figures.