0148 GMT March 18, 2018
On his return from right elbow surgery, Djokovic looked a pale shadow of his former self as he went down 7-6(3), 4-6, 6-1 to make a quick exit from a tournament he has won five times, Reuters reported.
Djokovic's performance in the final set against the world's 109th-ranked player on center court raised some eyebrows.
Four-time Grand Slam champion American Jim Courier questioned the Serb's effort, saying Djokovic had "capitulated."
"The question marks surrounding his defeat today will only grow larger," Courier said in commentary on the Tennis Channel.
"We wondered post surgery what it was going to look like, how his elbow was going to react to the strain and stress, but it was his heart and head that didn't react the right way in this match. That is as head scratching as anything you'll see."
Twelve-time Grand Slam champion Djokovic, who was seeded 10th, acknowledged his poor performance.
"It felt like the first match I have ever played on the tour, very weird," he told reporters. "I just completely lost rhythm, everything, struggled a little bit with the health the last couple of weeks.
"I was grateful to be out on the court after surgery that quickly but at the same time just didn't feel good at all. Nerves were there. I made so many unforced errors."
Djokovic took six months off after Wimbledon last year and returned in January's Australian Open where he lost in the fourth round. He had surgery in Switzerland shortly after that.
Daniel had won two rounds of qualifying and then held off fellow qualifier Cameron Norris to book a first meeting with Djokovic.
Simona Halep, meanwhile, survived a scare to reach the fourth round at Indian Wells but French Open champion Jelena Ostapenko was beaten.
Romanian top seed Halep lost the first set against 19-year-old American Caroline Dolehide, the world number 165, but won 1-6, 7-6 (7-3), 6-2, BBC Sport reported.
Ostapenko, 20, lost 6-3, 6-3 to Croatia's Petra Martic.
American Amanda Anisimova, 16, caused an upset when she knocked out ninth seed Petra Kvitova 6-2, 6-4.
In doing so, she ended Kvitova's run of 14 victories – which have included tournament wins in St. Petersburg and Doha – and became the first 16-year-old to reach the fourth round here since Viktoriya Kutuzova of Ukraine in 2005.