There is an emerging concern about the viability of small farm agriculture, particularly in the context of on-going process of globalization. It is contended that viability of small farms can be improved through diversification of agriculture into higher-value crops like fruits and vegetables. This paper has assessed the impact of diversification of agriculture towards vegetables on farm income and employment using household level information from the Indian state of Uttar Pradesh. The results clearly reveal that vegetable production is more profitable and labour-intensive, therefore it fits well in the small farm production systems. The smallholders are relatively more efficient in production and own more family labour in contrast to large farmers. Vegetable production is the emerging sector in agricultural diversification that would augment income of smallholders and generate employment opportunities in rural areas. Women are also benefited as the vegetable production engages relatively higher women labour in various operations. However, prevailing constraints do not allow smallholders to fully expropriate the emerging opportunities in vegetable production. Major constraints in vegetable production are lack of assured markets and a well-developed seed sector. Since vegetables are perishable in nature, lack of efficient marketing system and appropriate infrastructure results in huge post-harvest losses. Further, non-availability of improved and good quality seeds reduces the profitability and increases production risk. Other important factors that restrict expansion of area under vegetables are higher price and yield risks as compared to cereals and low marketable surplus that increases transaction costs. The vegetable prices are highly volatile, which severely affect the profitability in the event of marginal increase in their supply. Low volume of marketable surplus also adversely affects the bargaining power of smallholders and thus results in realizing lower prices. The possible solution for overcoming this is through developing institutional arrangements that strengthen farm-firm linkages. Contract farming is one such arrangement that helps smallholders to overcome the constraints in vegetable production.