Negative externalities in groundwater irrigation arise due to overdraft of groundwater leading to premature well failure, and reduced yield and age/life of wells. A watershed development program aiming at recharging aquifers, facilitating sustainable groundwater use, is the focus of this study. Primary survey data from farmers using groundwater for irrigation in a dry land watershed in peninsular India are analysed. Results indicate that, even after considering (i) amortized cost of watershed, (ii) amortized cost per acre-inch of groundwater, and (iii) electricity cost of groundwater extraction, the net returns in watershed are economically viable. This can aid policy-makers, addressing groundwater overdraft leading to negative externalities, reach solutions with the assistance of a watershed development program enhancing groundwater recharge in dryland areas in developing countries.