Prime Minister Manmohan Singh announced the $82 million mission during a speech Wednesday marking the 65th anniversary of India's independence from British rule.
"This spaceship to Mars will be a huge step for us in the area of science and technology," he said.
The spacecraft will orbit Mars to collect data after its launch in November 2013 on a frequently used rocket developed by the Indian Space Research Organization.
India has had an active space program since the 1960s and has launched scores of satellites for itself and other countries.
In 2008, India successfully sent a probe to the moon that detected evidence of water on the lunar surface for the first time. India is also planning a rover mission to the moon and is awaiting budgetary approval for a manned space mission.
Critics of Singh's Congress party say instead of the Mars mission, the government should concentrate on providing the basic needs of people such as electricity and safe drinking water. Two weeks ago, the electricity grids that serve more than 600 million Indians collapsed for hours in the world's largest blackout.
Indian scientists dismiss the criticism, saying that technology developed in the space program has resulted in spinoffs in other areas.
"It is certainly not a question of misplaced priorities," former ISRO chief U.R. Rao was quoted as saying by The Asian Age newspaper.
ISRO chief K. Radhakrishnan said the Mars mission must take place when the planet is closest to Earth, which happens every 26 months. There are three "windows of opportunity" in late 2013, 2016 and 2018, and Indian scientists are aiming to be ready for the 2013 opportunity, he said.
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