This study aimed to analyze the ecological, socio-economic and policy implications of land-use diversity in a traditional village landscape (900–1,000 m amsl.) in the Garhwal region of Indian Himalaya. The village landscape was differentiated into three major land-use types viz., forests, settled agriculture and shifting agriculture. Settled agriculture was further differentiated into four agroecosystem types viz., homegarden system (HGS), rainfed agroforestry system (RAS), rainfed crop system (RCS) and irrigated crop system (ICS), and shifting agriculture system (SAS) was differentiated into different stages of a 4-year long cropping phase and a 7-year long fallow phase, and forests into Community Forests (CF) and Reserve Forests (RF). HGS is the most productive agroecosystem, with soil organic carbon and nutrient concentrations significantly higher than all other forest/agricultural land-uses. Farmers capitalize upon crop diversity to cope with the risks and uncertainties of a monsoon climate and spatial variability in ecological factors influencing productivity. The SAS, a land-use adopted as a means of acquiring inheritable rights over larger land holdings provided in the policies during the 1890s, is less efficient in terms of land productivity than the traditional RAS and HGS but is maintained for its high labour productivity coupled with availability of high-quality fuelwood from fallow vegetation. Dominance of fodder trees in the RAS seems to derive from policies causing shortage of fodder available from forests. Cultural norms have favoured equity by allowing hiring of labour only from within the village community and income from non-timber forest products only to the weaker section of the society. Conversion of rainfed to irrigated cropping, a change facilitated by the government, improves agricultural productivity but also increases pressure on forests due to higher rates of farmyard manure input to the irrigated crops. Existing forest management systems are not effective in maintenance of a large basal area in forests together with high levels of species richness, soil fertility and resistance to invasive alien species Lantana camara. Farmers have to spend huge amount of labour and time in producing manure, managing livestock and other subsidiary farm activities. Interlinkages among agriculture, forests and rural economy suggest a need of replacing the present policies of treating agricultural development, forest conservation and economic development as independent sectors by an integrated sustainable development policy. The policy should promote technological and institutional innovations enabling parallel improvements in agricultural productivity and functions of forest ecosystems.