The 750-bed hospital and institute will be built at a cost of Rs 925 crore and will be spread over 200 acres.
The AIIMS project will cater to south-west Punjab, comprising the districts of Bathinda, Mansa and Sangrur where cancer and other diseases are widely prevalent.
Addressing the gathering here, Modi said: "Social infrastructure is essential for the development of every nation. We need top quality schools and hospitals."
The institute, which will be completed in two years, will also cater to the needs of the people in adjoining areas of Haryana and Rajasthan.
Bathinda is the Lok Sabha constituency of Union Food Processing Minister Harsimrat Kaur Badal.