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This study assesses the economic and productivity impacts of three chilli farming models—contract farming, Farmer Producer Organizations (FPOs), and traditional non-contract farming—in selected districts of Andhra Pradesh, India. A sample of 135 farmers was analyzed using partial budgeting and decomposition analysis. Results showed that FPO farmers achieved the highest net income and yield, followed by contract farmers, while non-contract farmers lagged behind. Partial budgeting revealed net gains of ₹5,147.10/ha for contract farmers and ₹28,197.13/ha for FPO farmers over non-contract farmers. Decomposition analysis indicated yield advantages of 23.17% for contract and 36.57% for FPO farmers, primarily driven by technological improvements rather than increased input use. These findings highlight the significant benefits of organized farming systems, especially FPOs, in boosting chilli productivity and profitability. Promoting such models can strengthen the economic resilience of smallholder chilli farmers and enhance sustainable agricultural practices in India. This can be achieved by strengthening institutional support for FPOs through access to credit, training, and collective marketing; encouraging fair and transparent contract farming arrangements with assured price mechanisms; improving extension services to disseminate advanced technologies; and fostering public–private partnerships.