The statement, by the Ministry of Electronics and IT, comes in the wake of a number of deaths which are said to have been caused by the spreading of rumours on WhatsApp.
It is in effect an order to the social media giant that it will have to break encryption on the platform when it is deemed necessary by Indian authorities.
"...WhatsApp has been requested today to come out with more effective solutions that can bring in accountability and facilitate enforcement of law in addition to their efforts towards labelling forwards and identifying fake news," the statement said. "It has been conveyed to them in unmistakable terms that it is a very serious issue which deserves a more sensitive response."
Last week, WhatsApp said it would roll out software changes to make it harder for messages to be forwarded.
The ministry said that after WhatsApp had announced this change, an incident in Bidar in the south Indian state of Karnataka, had led to the death of a software engineer following rumours on WhatsApp about child abductors.
"It is regretted that the enormity of the challenge and the rampant abuse happening in the country leading to repeated commissioning of crimes pursuant to rampant circulation of irresponsible messages in large volumes on their platform have not been addressed adequately by WhatsApp.
"Reports in the media resonate the general sentiment that there is much more that needs to be done by WhatsApp. There is a need for bringing in traceability and accountability when a provocative/inflammatory message is detected and a request is made by law enforcement agencies.
"When rumours and fake news get propagated by mischief mongers, the medium used for such propagation cannot evade responsibility and accountability. If they remain mute spectators they are liable to be treated as abettors and thereafter face consequent legal action," the ministry statement warned.