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The finite and fragile water resources of India are depleting while demands are growing rapidly in line with urbanization, population growth, and industrial development. Even in this situation, water continues to be used inefficiently in all sectors. The current institutional arrangements are no-longer adequate for sustainable water management. The current approach in the water sector emphasizes development of water resources and infrastructure under a top-down, supply-oriented and fragmentary framework. Fundamental reforms are required in the sphere of water development, allocation, delivery and management. The National Water Policy of India and state level policies considerably reflects the reform requirements in the level of water institutions. It is argued that, privatization of the water sector would enhance efficiency and sustainability in spite of it's drawbacks which would affect poor communities in the society. The disadvantages of privatization could be controlled by private sector participation in the management and service delivery of water by the public sector.