Rainfall in India generally, occurs, in short period, most of which is lost as run-off; eroding significant quantities of precious top soil, hence rainfall goes unproductive. This results in reduction of farm production, ultimately hampering the overall economic growth of rural people. Watershed management can play a vital role in resolving this problem. The paper studied watershed management developments for Kaneri village which is located at outskirts of Kolhapur city. In spite of sufficient monsoon rainfall (973mm) people in this village face scarcity of water for agricultural and domestic use in summer. The rainwater does not percolate into the ground but flows over the earth surface. This has resulted in depletion of ground water table, so reduce crop yield and income from agricultural activity is low. So it has become necessary to develop the means to storage of runoff and recharge ground water resources which are essentials for improving living standard of people. In this paper, the existing economical status and causes behind economical problems of people living in Kaneri village, is discussed. This paper describes the watershed condition by watershed budgeting and using other engineering measures. This data is used to identify the best watershed management options and solutions for improving economical status of Kaneri village. Further this paper presents the effectiveness of various watershed management options for economical development with the help of a case study and using before-after concept. It is found that watershed management activities increases crop production by 38.33% and per capita income by 30.14%. Thus it is concluded that economical development of rural people can be achieved through watershed management.