Almost three years after a special commission report made 109 recommendations, the Perrottet government finally responded on Wednesday by supporting 86 of them.
It had already rejected decriminalising drugs, introducing pill testing and ditching drug dogs.
Premier Dominic Perrottet announced $358 million would be spent to close systemic gaps and improve outcomes.
Pre-court drug diversions for people without prior convictions will give users a chance to break their destructive cycle by undertaking courses and counselling rather than go through the courts.
More than $141 million will be allocated for justice, aiming to address the underlying causes of drug use and its impact on other offending.
The $10.8 million inquiry received more than 250 submissions and was handed down in January 2020.
Drug users will have more opportunities to get help before they're jailed, but there is still "zero tolerance for drugs".
Mr Perrottet said he did not believe in decriminalisation, Police Minister Paul Toole said the government's response was "not about going soft on drugs" and Police Commissioner Karen Webb said the force would still target "those that create the problem that we're trying to deal with".
Nothing changes for dealers and traffickers, but their customers and victims will get more help to beat their addictions.
Specialist drug courts will be expanded, with Sydney's running five days a week instead of one.
An Indigenous court list and other culturally-geared initiatives including the Youth Koori Court and Circle Sentencing will be boosted through the justice response.
Early intervention in prioritised populations (Indigenous, pregnant, young, or mentally ill people), upgrading capacity for telehealth consults and virtual healthcare, and more staff are part of the health response.
The government says about 30,000 people dependent on drugs could benefit, along with more than 11,000 people who have "alcohol and other drug related offending behaviour".
Pre-court drug diversions will take time to introduce.
Ms Webb and Chief Health Officer Kerry Chant will give advice by the end of June and the government will decide whether to proceed.
Greens drug law reform spokeswoman Cate Faehrmann blasted the delay.
"It's a cowardly move by the government that after delaying their response for nearly three years they are now delaying any program to divert people from the courts and remove criminal penalties for drug use until after the (March) election," Ms Faehrmann said.
The commissioner who led the inquiry, Dan Howard, has said he was distressed by the government's "hard-line" approach to drugs.
There was an imbalance in how much Australia spent on policing compared to harm reduction and "helping people who need help", he told ABC radio on Tuesday.
The current approach drove drug users into the shadows, instead of helping them seek treatment, he said.
The government will not support more medically supervised injection centres.
Independent Sydney MP Alex Greenwich, whose electorate includes the injection facility at Kings Cross, urged a more ambitious approach.
"It's plainly obvious that a law and order focus for people experiencing problems with drugs is failing and that we need a big shift to a health approach," he said.
He welcomed the expansion of Sydney's drug court, saying it will save people getting criminal convictions and divert them to support services instead.
Uniting NSW/ACT advocacy and external relations manager Emma Maiden said the government's response ignored key expert evidence.
"It is tragic that hundreds of thousands of people have been turned away from health services for alcohol and drug problems since the Ice Inquiry report was handed down," she said.
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