Prayas, a Pune-based organisation, alleges that a committee led by Mr Pawar in 2003 allowed farm water to be diverted to beer and sugar factories in Pune district.
The NGO says the diverted water could have fed farmland nine times the size of Greater Mumbai and reduced the impact of drought in Maharashtra.
Mr Pawar insists he went by the rulebook. He says industries were high on priority in the state's water policy then, and next only to drinking water needs.
The policy, he says, has since been revised less than two years ago to give farms priority over factories.
Maharashtra is facing its worst drought in 40 years. Politicians of the ruling NCP-Congress have been accused of diverting dam water to sugarcane factories allegedly controlled by them or their aides.
Around 65 per cent of the sugar produced in Maharashtra comes from drought prone western Maharashtra, the Pawar family stronghold.
Last week, Mr Pawar walked into controversy when he dismissed a farmer's two-month-long protest and sarcastically asked if leaders should urinate to fill up a dam he is demanding water from. Mr Pawar said: "There is this person from Solapur, sitting on hunger strike for 64 days demanding water be released from the dam. But where are we going to get water from? Should we urinate?"
Faced with severe criticism, he apologised later.