Being not familiar with Indian traditions (and because the question can be understood fairly universal) I will answer this in a more general way:
On the value of including children in cultural traditions:
Being a part of a society, a religon or another cultural group is something that can and should be learned rather early on1. It's part of developing a cultural identity and experiencing (or "grasping") what these events are about. So by all means do let your child participate. While I wouldn't let a small child light fireworks, I usually find an age-appropriate activity or task they can handle. It may be in the preparation of special food, in decorating or doing small jobs at the actual event. It's all about being part, not a bystander.
On our own expectations:
A child's contribution may not meet the highest artistic standards. But the sense of accomplishment and participation outweights the "aesthetical shortcomings" of their results. Maybe your daughter won't always hit the middle of a flower or mine will present their grandparents with an awfully loopsided christmas ornament. But still it will feature a prominent place on their christmas tree or in your home. It's a sign of dedication and love that we do things ourselves and it serves as a great teachable moment for our children. We do our best, but being not perfect is ok.
On typical techniques and things to make:
"Traditional" crafts vary a lot. Yet many use common elements like
- cutting things apart or into shapes (paper snowflakes or carving pumpkins)
- piecing/glueing/tying/positioning things together or
- drawing something.
- There might be some kind of sculpting involved (think special breads)
- and the artistic display of objects inside or outside of a house (lights/candles, decorating a Christmas tree or an altar/shrine, hanging a garland) according to some kind of "cultural standard".
In short, if you look closely, you will probably find the entire range of crafting that is usually taught at preschool etc. represented in one or many holidays. Be creative....
On proper tools and safety:
Any tool we use comes with a (virtual) set of "how to use it" rules. Be it a spoon, a pair of scissors or a knife, all have their specific uses and techniques. As in everyday life you have to set and enforce the rules of proper and safe handling. Simple examples are that a knife should only be used when sitting on a table or on the floor, not something you hold in your hand while runing around. Likewise, no running around if another person holds a knife. The point of the knife should always point down and away from you. If carving, you carve away from you. If you cut vegetables, you use "claw fingers"... Use common sense and explain the rules. Supervise, explain again, if necessary.
It largely depends on the individual child which tools are "ok" and which are "dangerous". But with good guidance, many children can safely use "sharp and pointy" things quite early. It is always an option to let a child try under close supervision and see how it goes. While a small nick or cut is possible, serious and permanent damage is extremely unlikely if basic safety rules are observed. And please do not think blunt tools are automatically safer - any cook knows that a blunt knife is more likely to slip and therefore essentially more dangerous. Use appropriate tools for the task at hand.
1 In a more everyday sense, we teach proper table manners and other social norms by simply letting them participate and guiding them. A method probably all parents around the world use every day.
