After India secured the triangular one-day competition with a nine-run win in the second match in Brisbane on Tuesday, Hughes told AFP, "The sleeping giant has awoken."
"At least Australia has some decent competition and it's fantastic for cricket," he added.
"England came up in 2005 but they have fallen right off the pace again.
"There is no doubt India are ready to challenge and this is only the start."
Hughes was full of praise for Indian captain Mahendra Singh Dhoni, who backed his young players for the tri-series, controversially doing away with the services of veterans Rahul Dravid, VVS Laxman and Sourav Ganguly for the one-dayers.
"Dhoni has changed the attitude of the Indians and the young players are more desperate," Hughes said.
"These guys will run through walls for their captain.
"They play with less fear and want more opportunities.
"And the younger guys have improved the fielding of the team."
As the Australians licked their wounds, The Daily Telegraph newspaper also warned the time was coming when Australia may not be the world's best team.
"The gap between Australia and the rest has closed to the point where the national selectors must be getting sweaty palms. The Indian team which trumped Australia last night contains just one player -- Sachin Tendulkar -- over 30," the newspaper said.
"Australia, by contrast, had just three players -- James Hopes, Michael Clarke and Mitchell Johnson -- under 30. Earlier this week India stormed to victory in the under-19 World Cup. They are a nation on the rise.
"Australia are not tumbling into any sort of abyss but they are in slight decline."