Roger Federer needs to advance to the quarter-finals in Florida to hold on to his number one ranking, or face being supplanted by old rival Rafael Nadal in top spot.
Roger Federer remained at the number one spot with 10,060 points.
Rafael Nadal's withdrawal was greeted with dismay by Indian Wells tournament director Tommy Haas.
Rafael Nadal said he is not motivated by a desire to reclaim the position from Roger Federer.
It is Roger Federer's first time back at the summit since October 2012 having first claimed the top position in February 2004.
Rafael Nadal is leading the latest ATP Rankings with 9,760 points while Caroline Wozniacki leads the Women's list with 7,965 points.
The gutted Spaniard was forced to retire with a hip problem early in the fifth set of his Australian Open quarter-final against sixth seed Marin Cilic on Tuesday.
World number one Rafael Nadal faces three weeks out after being diagnosed with a torn inner hip muscle during his Australian Open quarter-final defeat
Cilic won 3-6, 6-3, 6-7 (5/7), 6-2, 2-0 in 3hr 47min on Rod Laver Arena and will face Britain's Kyle Edmund for a place in the final on Thursday.
Nadal was taken to four tough sets in almost four hours before winning 6-3, 6-7 (4/7), 6-3, 6-3.
Rafael Nadal stormed into the round of 16 at the Australian Open Friday with a vintage performance as Grigor Dimitrov and Caroline Wozniacki kept their Grand Slam hopes alive on a hot draining day.
Nadal, a losing finalist to Roger Federer last year in Melbourne, will face Bosnia-Herzegovina's 28th seed Damir Dzumhur in the third round.
Nadal needs to reach the quarter-finals to be certain of retaining his world number one ranking after the Australian Open, with Federer breathing down his neck.
Rafael Nadal, who is gunning for a 17th major title but only his second Australian Open crown, was hampered by a knee injury at the tail-end of the 2017 season.
Djokovic made a winning return on Wednesday after six months out with an elbow injury, declaring he felt "great" after beating world number five Dominic Thiem.
World number one Nadal, who missed the warm-up Brisbane International last week with a knee injury, is set for just one appearance on Tuesday when he faces France's Richard Gasquet.
Reports casting doubt over Nadal's recovery from an injury to his right knee surfaced last week when he pulled out of an exhibition in Abu Dhabi this week and took at least four days off from practice.
The ex-minister from 2007-2010 alleged that Nadal had faked an injury in 2012, when he missed the final six months of the season due to knee problems, in order to hide a positive drug test.