Merkel is on a tour of India.
Photos of Merkel's official visit show the visible effects of smog at the presidential palace - though both Modi and Merkel ignored the declared public health emergency and did not wear masks.
"We have made a decision to tap cooperation possibilities in e-mobility, smart cities, cleaning of rivers and environmental protection", Mr. Modi said.
He said that India has invited Germany to take advantage of opportunities in defence production in the defence corridors in UP and Tamil Nadu.
While addressing an audience at the Indo-German Chambers of Commerce, Merkel said she had an open discussion with Modi about problems faced by German companies and difficulties reported by small and medium enterprises to find way around the "bureaucracy labyrinth". "We also have a common interest in developing Afghanistan", said Merkel.
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Both sides also expressed their intent to work together to foster, encourage and develop cooperation on Artificial Intelligence technologies and thereby promote innovation and sustainable development.
The talks are the fifth in a series of biennial bilateral summits between Germany and India. Previously, the two countries had signed the Joint Declaration in the Field of Digitalisation, Empowerment and Economic Impact in 2017 to broaden the digital dialogue. "I do not want to anticipate what the two leaders will be talking about". "In order to sustain the positive developments and to achieve the ambitious targets of the Indian government to provide 175 GW power from renewable energy until 2022 and 450 GW in later years and of the German Government to provide 80% of total power generation from renewable energy by 2050", the statement said. Modi said the two countries would also bolster ties to combat "terrorism and extremism".
"We have good technology in water and waste management", she said.
Before heading home, the chancellor will also visit the Dwarka Sector 21 Metro Station.
Germany is India's largest trading partner in Europe and bilateral trade has hovered at around US$20 billion (S$27.21 billion) for the past five years.