The problem of inter-sectoral water allocation is investigated for the utilizable water in the Cauvery river basin in the state of Karnataka, India. This paper aims to maximize the total benefit of available and utilizable water while trying to ensure a certain basic water right for every individual. It also aims to meet irrigation requirements as put forward by government (central or state) in drought contingency plan. In this context, a novel nonlinear optimization model is developed which utilizes hydro-agro-economic data collected from multiple sources. This optimization model allocates the available water among different competing sectors which includes municipality, industries and agriculture. Furthermore, the sensitivity analysis evaluates the economic impact of different parameters of competing demands such as water availability, population and basic water right (quantity). The results of this study reveal that the basic water right for essential needs can be ensured with integrated management of available surface water resources. This novel optimization model and policy analysis can be readily applied to other river basins across the globe.