Germany is to invest $1.12 billion on environmentally-friendly urban mobility projects in India, Chancellor Angela Merkel announced on Saturday.

Merkel, who is on a two-day visit to the South Asian nation, agreed to extend financial support for climate initiatives and signed a joint declaration to that effect.

"We have agreed to co-operate on climate protection and green urban mobility and have earmarked 1 billion euros towards this," she said at an event in the Indian capital.

Merkel also stressed on the need to replace public transport vehicles that run on diesel with electric variants.

The German chancellor's arrival Thursday night, along with several cabinet officials and a business delegation, coincided with New Delhi recording its worst air quality of the season, the very next day.

Pollution levels rose to 'severe plus' on Friday, forcing authorities to declare a "public health emergency", ban construction work and shut schools till 5 November.

Funds provided by Germany will be used for a number of green mobility programs like reforming public transport in the southern state of Tamil Nadu.

Both Merkel and her Indian counterpart Narendra Modi agreed to cooperate on a number of other sectors as well, including agriculture, healthcare and artificial intelligence.

They also decided to revive stalled talks over a free trade agreement between India and the European Union (EU).