You should apply to have your passport re-issued*.

This FAQ page from the Indian Government, Ministry of External Affairs, Consular, Passport and Visa Division, contains this text:

Passport Services Overview

Q1: What are the various passport services and which form has to be filled in?

• A: The various passport services are:

(items 1 and 2 omitted)

• 3. Re-issue of Passport: You can apply for re-issue of passport if you want another passport in lieu of an existing passport for any of the following reasons:
     • Change in existing personal particulars.
     • Validity expired within 3 years/ Due to expire.
     • Validity expired more than 3 years ago.
     • Exhaustion of pages.
     • Damaged passport.
     • Lost passport.

(Q2 omitted)

Q3: How do I apply for a passport in the new system?

• A: For issue of fresh passport and re-issue of passport, you need to fill the application form online via e-Form Submission (preferred) or via Online Form Submission.
  • For Police Clearance Certificate (PCC) also you need to fill the Police Clearance Certificate (PCC) Application Form online via e-Form Submission (preferred) or via Online Form Submission.
  • Under the new system it is mandatory for all applicants, including infants, to be physically present at the Passport Seva Kendra (PSK) or the Post Office Passport Seva Kendra (POPSK) to give their biometrics(fingerprints) and photographs.

(Q4 through Q45 omitted)

Q46: My passport will expire in 2 years. What should I do?

A: You can apply for a re-issue of passport up to 1 year before the expiry or within three years after the expiry of the existing passport without fresh police verification, provided there is no change in personal particulars and there is clear police report with respect to your previous passport and there is no adverse entry in the system. You can also apply for re-issue of passport if your previous passport expired more than three years ago, but fresh police verification would take place.

*The FAQ is confusing, as the Indian Government uses the word "reissue" to refer the situation where a new passport is issued in place of an existing, soon-to-expire or damaged one; we would usually call this a "renewal." Q4 (quoted in Daniil's answer) compounds the confusion.

Because it makes no sense at all to re-issue a soon-to-expire passport with the same soon-to-expire date, however, I assume a reissue under Q.1.A will have a new later-in-time expiration date.

If I am applying for reissue of damaged passport will I get a renewed passport?

Yes, your passport is damaged according to the Indian Ministry of External Affairs, Consular, Passport and Visa Division:

Q1: What is the definition of damaged passport?

A: Damaged passport is classified further based on the extent of damage, i.e.:

• Damaged Passport - Passport number is readable, name is legible and photo is intact
• Damaged beyond recognition

You say Photo is smudged 20-30 %, therefore, the photo is not intact. Your passport is damaged.

Can I apply for renewal with a damaged passport.

Yes you can. This passport may not be accepted in other countries, to re-issue your passport:

Q4: What is the procedure to apply for duplicate passport in case of lost or damaged passport?

A: To apply for duplicate passport in case of lost or damaged passport, you need to apply for "Re-issue" of passport.

This is a re-issue of your passport. It will be a duplicate with the same expiration date. The re-issue passport and renewal options are different. After receiving your passport you will need to renew it separately.

What are the chances of rejection if I am applying for a UK Visit visa(Only for tour)?

This may well be rejected as your passport is considered damaged.

Your damaged is considered wear and tear, so if you need to go abroad on an urgent basis, you can apply for an urgent replacement passport under the Tatkaal scheme:

Q6: My passport booklet is damaged. I want to go abroad on urgent basis. What should I do?

A: In case your passport has not been damaged beyond recognition, i.e. passport number is legible, name is legible and photo is intact, then you can apply for re-issue of passport under the Tatkaal scheme. But, if passport has been damaged beyond recognition, then you cannot apply under the Tatkaal scheme. In that case, you need to visit Passport Officer at your nearest Passport Seva Kendra to get the passport on urgent basis.