This study aims to analyse the current state of management of the water resources in the Hani Rice Terrace system. Using the evidence indicating the presence of scarcity and periods of concentrated availability obtained from the hydrological response assessment of the selected study sites, a comprehensive threats analysis has been done, considering the overarching social, policy and institutional threats faced by the system. Analysis of the people’s perceptions about water scarcity and the current systems of management on the field indicates that the water scarcity evidenced from a physical systems standpoint is being directly affected by the social and policy systems on the field and posing a threat to the long term sustainability of the area. Dealing with the physical systems threat of reconciling water availability with equitable access requires structural and non-structural mechanisms of management that can be used on the field, including institutions building at the micro level for the farmers and having the basin as a unit for macro level management. Water Scarcity Index has been found to be a powerful tool for aiding policy in such cases. Additionally, ensuring the overall sustainability of the system by assessing the development patterns and demographic changes has been suggested.