Helicopters showered petals on the crowds, and then tanks, missiles, stiffly saluting soldiers, brass bands and dancers filed past the guests.
Obama's presence at the parade signals Modi's willingness to end India's traditional reluctance to get too close to any big power. Instead, he is seeking close ties with them all, even as he pushes back against China and take sides on other global issues.
Modi has injected a new vitality into the economy and foreign relations since his May elections.
Obama's second visit to India is the latest upturn in a roller-coaster relationship with Washington that a year ago was scarred by protectionism and a fiery diplomatic spat.
The United States views India as a vast market and potential counterweight to China's assertiveness, but has been frustrated with the pace of New Delhi's economic reforms.
"There are still too many barriers, hoops to jump through, bureaucratic restrictions that make it hard to start a business, or to export, to import, to close a deal, deliver on a deal," Obama told a forum of CEOs from both countries in New Delhi.
In a joint statement that made a veiled reference to China's territorial claims, Modi and Obama stated their commitment to freedom of navigation in the South China Sea.
India could even play a role in battling Islamic State, the White House said on Monday, underlining the confidence that New Delhi is increasingly prepared to engage with global security.
"The leaders agreed to exchange information on individuals returning from these conflict zones and to continue to cooperate in protecting and responding to the needs of civilians caught up in these conflicts," the two sides said in a joint statement.
They also agreed to a 10-year framework for defense ties and struck deals on cooperation that included joint production of drone aircraft and equipment for Lockheed Martin C-130 military transport plane.