This study aimed to understand the issues associated with rainfed rice production in dry and semidry areas in Tamil Nadu, India. Farmers face risks such as input, output, market-price, and income, as these areas are prone to rainfall shortage. Secondary data about Tamil Nadu and various water limited rice environments were studied. A farm survey of 230 farm households in selected districts was conducted in 2001-02 and 2003-04. Fertilizer use in rainfed areas was reduced due to rainfall shortage. In drought period, crop response to fertilizer declined, causing a decrease in rice yields. Yield variability was higher (44 percent to 60 percent) in drought-prone areas. In rainfed areas, a 10-percent increase in drought risk resulted in a 5.4 percent decline in the yield of modern varieties. In contrast, the effect on landraces was minimal. Farmers in the rainfed areas are operating at sub-optimal level of Production. About 90 percent were inefficient since crop yields were lower than the optimal yield. Farmers incurred an additional cost of INR 899 to increase yield by 228 kg/ha. An increase in rice productivity by one ton per hectare would replace rice area by 189,208 hectares in Tamil Nadu. Area expansion under rice was noticed in the selected rainfed areas, revealing that infusing high productivity traits in drought-tolerant rice varieties enable farmers to allocate part of their land to other crops. Traits (genetic and marketability) of widely adopted modern varieties and landraces should be considered in breeding varieties for water-limited environments to earn profits. The results confirm that drought intensity is higher during the maximum-tillering stage, therefore, continued research on development of drought-tolerant rice varieties to withstand early drought is crucial. Finally, rice income variability in rainfed areas was explained more by variability in yields rather than prices both during normal and risk periods. In other areas, income variability was due to price variability. Yield stabilization would be more effective in keeping revenues stable in rainfed areas, while price stabilization, is an appropriate strategy for reducing revenue risk in irrigated areas.