The home side resumed on 515 for eight and added 57 more in good time before being bowled out for 572 - a daunting lead of 192.
By the interval, Michael Clarke's men were 34 for one after Watson was dismissed at the last possible moment by Ravichandran Ashwin.
Mahendra Singh Dhoni, scorer of an unforgettable double century on day three, was finally out for 224 when he nicked James Pattinson to Matthew Wade at the wicket.
But if Australia thought their work in the field was done, India had other ideas as Bhuvneshwar Kumar and Ishant Sharma added 26 more for the last wicket.
The debutant Kumar finished with 38 before Peter Siddle wrapped things up.
Pattinson's five for 96 was by some distance the best return on an otherwise messy bowling card.
Australia faced a tough challenge on a pitch that had started to turn plentifully and were given a further obstacle when David Warner was deemed too ill to open.
Watson replaced him in his old position and he, along with Ed Cowan, was confronted by spin at both ends from the off.
Ashwin struck with the final ball of the session, finding the shoulder of Watson's bat and seeing a simple catch swallowed by Virender Sehwag.
- Sports & Recreation
- Mahendra Singh Dhoni
- James Pattinson