As many a group found out in the late 60s, the key to success in a group was having a stable and happy group dynamic. This doesn't sound very sexy, but when you consider the groups that kept on going as opposed to those that didn't, those that did were able to continue because everyone was - more or less - content with what their role in the band was. If you have three people in a band who work together on songs and a third who comes in with a song in hand, expecting the others to play it just so then there's going to be problems.
Traffic were such a group; Jim Capaldi, Steve Winwood and Chris Wood wrote songs together (the first two wrote the previously mentioned "Paper Sun") and Dave Mason tended to write songs on his own, like this one. The other three didn't like it but recorded it anyway; I can guess it was a bit too whimsical for them. (Traffic were made up of musicians who had gone out to the countryside, away from the industrial Midlands, to, as they said back then, "get their heads together.") It has all the hallmarks of something almost too typical of the time - sitar (played by Mason), flute, lyrics that once again focus on water (is water the most psychedelic of the elements?), a young girl's narration straight out of a fairytale. The "elephant's eye" harks back to Oklahoma!, the unreal fields (strawberry?) full of tin soldiers, the passive voice wherein everything seems to be happening to him - the only thing he is sure of is that pesky hole that is letting in water...
...this does seem a bit cliched, but then being on a trip at this time was likely the same as having a mystical experience way back when; there are similar experiences and vocabularies you use to explain what is otherwise hard to describe to anyone else. But there is a fine line between using language others can understand and using language everyone has heard before. The psychedelic experience here is fantastical ("bubblegum tree" Mason sings, as if foreseeing the bubblegum pop explosion to come) and disconcerting, and it is only the literal hole in his shoe that is grounding him, perhaps keeping him from floating off to this other world altogether.
So this is not a song about complete absorption, but that tingling sensation that can be an anchor through an otherwise strange experience - and he ends up on his back, his coat getting wet, waking up much like the narrator of "Flowers in the Rain" in that he's outside and communing with nature, not airborne like the child narrator on the albatross, off to a place where the music plays loud.
This is psychedelia as genteel escapism, as opposed to psychedelia that has something to say, per se: it is always awkward when something that seems meaningful to you personally has to be explained to the masses, so Mason must have been gratified (though it irked the others) that this was their biggest hit. They wanted something a bit tougher lyrically and musically, I'd expect; but in the late hazy days of '67 the single-buying public wanted to digest psychedelia as a pastoral thing that didn't threaten their lives but gave them a window to a world where having wet feet was the biggest problem.
What was startling in the winter of '67 was by the fall an accepted commonplace. Dave Mason came and went in Traffic as they themselves ebbed and waned (Winwood formed Blind Faith with Eric Clapton for a while when the ever-embattled Cream broke up in late '68). As the music indeed got louder, bands found themselves in a dilemma - whether to make light "pop" music like this song or go into more complex and tougher territory, leaving behind anyone who just wanted a nice tune to hum on the way to work. '67 was a year when bands could have it all, but many had problems being all things to all single & album fans, and they had to make their choices. (Some had theirs made for them, such as Pink Floyd, whose most "pop" member was Syd Barrett, who was sidelined in the band and then formally left in '68.) The pop scene was changing and rock was the new thing - pop being left for The Housewives of Valium Court and kids who were young enough to enjoy psychedelic pop without asking too much of it.
Yes, the dreaded-by-some 'classic rock era' has by now begun, leaving the singles charts open to almost anything, as we shall see.