Agricultural water management (AWM) has been shown to improve and secure yields in the tropics and has been suggested as an important way to combat poverty in the region. In this paper, we describe potential impacts on upstream and downstream flows of extensive AWM interventions, using the watershed development programme of the Osman Sagar catchment of Musi sub-basin, Andhra Pradesh semi-arid India, as an example. Various AWM interventions are compared with a non-intervention state and the current state of the study area, using 31 years of data by application of the calibrated and validated ARCSWAT 2005 (Version 2.1.4a) modelling tool. Different AWM interventions contribute to improved livelihoods of upstream smallholder farmers by increasing soil moisture availability and groundwater recharge, which can subsequently be used for irrigation. The result is higher crop production and hence larger incomes. Moreover, lower flow intensities and sediment losses reduced by 30–50%, reducing the risk of flooding and sediment accumulation in the Osman Sagar drinking water reservoir. On the other hand, AWM interventions are predicted to result in reduced total water inflows to the Osman Sagar reservoir from 11% of the total annual rainfall (754 mm) recorded at present, to 8% if AWM interventions were implemented at large scale throughout the catchment. A cost–benefit analysis of AWM interventions showed that the highest net economic returns were achieved at intermediate intervention levels (only in-situ AWM). Copyright © 2012 John Wiley & Sons, Ltd.