The project's foundation stone was laid by Modi electronically from the courtyard of Bhutan's Parliament building after addressing a joint session.
Three Hydro-electric projects (HEPs) totalling 1416 MW (Chukha, Tala and Kurichu) are already operational.
Three more HEPs [Punatsangchu I (1200 MW), Punatsangchu II (1020 MW) and Mangdechu (720 MW)] are under construction.
They are scheduled to be commissioned in 2017-18.
In April, 2014, the two countries had signed a framework agreement on four more JV-model HEPs totalling 2120MW.
Of these, pre-construction activities for the 600MW Kholongchu HEP as a JV-model HEP between Satluj Jal Vidyut Nigam (SJVN) and Druk Green Power Corporation (DGPC) will commence soon.
"Our hydropower cooperation with Bhutan is a classic example of win-win cooperation," an Indian official said, adding that "the hydropower projects generate export revenues for Bhutan, cement our economic partnership and provide clean and low-cost electricity to India."
Modi arrived in Bhutan on Sunday on his first foreign trip after assuming office last month.