The present study was carried out to analyze the growth and instability in area, production and productivity of chilli and acreage response to chilli crop in arid zone of Rajasthan. The study was confined to five districts of arid zone having more than 500 ha area under chilli cultivation during last decade. The data were collected for the period 1960-2007 and analyzed by using exponential production function and instability index. The results revealed that area and production have increased in the arid zone of Rajasthan but with high instability. The productivity registered lower but relatively more stable growth compared to area and production which indicates that chilli production can be increased by stabilizing and sustained increase in area under chilli cultivation by efficient use of irrigation water. The farmers of the arid zone of Rajasthan tend to divert more area towards cash crop if current irrigation facilities are adequate.