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Dairy farming provides an excellent opportunity for self-employment of unemployed youth. It is also an important source of income generation for small and marginal farmers and agricultural labourers. Since agriculture is mostly seasonal, there is a possibility of finding employment throughout the year for many persons through dairy farming and landless labourers. Dairy farming in India is more of subsidiary activity represented by plurality of small holder dairy farmers and entrepreneurs. The value of milk alone is well above Rs.35 thousand crores and livestock contributes nearly 5% to National GDP, accounting for more than 25% of agricultural GDP (Planning Commission, 2010). Cluster sampling technique is adopted for identification of three clusters, which are mutually homogeneous but internally heterogeneous. Three clusters included three mandals of Khammam district i.e., Mudigonda, Kusumanchi, Nelakondapalli are selected for the study. The income from dairy farming is surpassing the income from crop production enterprises and the risk is less compared to crop. The dairy animals are not improved breeds, so improved breeds and cross-bred suitable dairy units will enhance the income from dairy. Even though the farmers have both livestock and dairy enterprises, there is a lack of integration to the extent of 50% of the sampled farmers. Such awareness has to be created. There is capital crunch created faced by marginal and small farmers, credit support and technical support would enhance the household income. Need for Government role in improving the supply of inputs and services to dairy farmers/beneficiaries at their doorsteps with minimum cost by promoting milk co-operatives which maintain the milk chilling and processing centres and play a remunerative price within a stipulated time. Developing viable farmer’s cooperatives societies/federations like: milk producers’ cooperative societies at village and district levels, federations, boards and corporations is needed.