The khadi institutions in Rajasthan have neither been able to stand the test of cost efficiency not make any significant contribution to employment and income generation for the artisan households. The root cause for this failure is lack of demand limiting the market for their woollen products. There is a need to revamp the existing production paradigm which, since it tacks correspondence with commercial viability, competitive rationale and the spirit of self-sufficiency, has pushed demand and marketability aspects of woollen khadi products to the periphery, 'KHADI' continues to be one of the largest forms of organised intervention of the government of India to generate rural employment and income. It insulates a techno- economically viable process of production in small and rural-industrial households [Ray 1991], Although the process has been nurtured since the Second Five-Year Plan (1956-61), importance has been attached to it especially after the economy was opened to the forces of liberalisation. The. apprehension is that increase in the incidence of unemployment would be the immediate fallout of the global integration of the economy. The remedy sought is through invigorating the rural non-farm sector, the industrial component of which fails largely under the purview of the khadi sector, with renewed emphasis. Tall claims are made by the Khadi and Village Industries Commission (KVIC). the apex organisation, about its achievements, and a huge sum of money is allocated by the central government in each successive plan to continue the same 'production paradigm' in the hope that such an organised intervention would eventually stand the test of being one of the most dependable instruments in generating employment and income for the rural poor. The present paper evaluates how efficiently and to what extent khadi institutions are able to achieve these objectives, and analyses the causes of the vicious circle of impoverisation the institutions are beset with.