The decision -- which the opposition BJP termed as political vendetta -- came a day after Prime Minister Narendra Modi mentioned the scheme at a program and praised Fadnavis, who is now the Leader of Oppoisition in the Assembly.
The decision was taken at the weekly cabinet meeting chaired by Chief Minister Uddhav Thackeray, Water Resources Minister Jayant Patil told reporters.
A statement from the chief minister's office said it would be an "open inquiry" based on the CAG report and complaints received from people.
A special investigation team (SIT) will be formed to probe the scheme, an official said.
The "Jalyukt Shivar Abhiyaan", a pet project of Fadnavis, was launched in 2014 with the objective of making Maharashtra drought-free by 2019.
The project involved deepening and widening of streams, construction of cement and earthen stop dams, work on nullahs and digging of farm ponds.
Shiv Sena, whose leader Uddhav Thackeray is now chief minister, was also a part of the Fadnavis-led government.
On Tuesday, Prime Minister Modi, while releasing the autobiography of former Union minister Balasaheb Vikhe Patil, lauded the work done by Fadnavis in the Jalyukt Shivar scheme.
However, the Comptroller and Auditor General (CAG)in its report submitted to the state legislature last month had observed that the scheme, under which Rs 9,633.75 crorewere spent, was not much effective.
It had little impact in achieving water neutrality and increasing the ground water level and its execution was characterized by lack of transparency, the CAG said.
"There was no politics involved in the decision. The CAG has given a report and it needs to be probed," Jayant Patil said.
Water Conservation Minister Shankarrao Gadakh said details of the nature of the probe would be announced soon.
State Congress spokesman Sachin Sawant welcomed the decision, saying that the scheme was a "hub of corruption".
BJP leader Ashish Shelar said Jalyukt Shivar was "a people's movement".
"Is the government going to probe the hard work of ordinary villagers? The decision is nothing but political vendetta," he said.
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