Artificial Intelligence (AI) is rapidly emerging as a transformative force in optimizing resource allocation and advancing sustainable economic development in India. With the digital economy projected to contribute nearly 20% of GDP by 2029, AI-driven technologies are increasingly being integrated across critical sectors such as agriculture, energy, healthcare, and governance to enhance efficiency, transparency, and inclusiveness. Strategic government initiatives, including the ₹10,300 crore and above India AI Mission and the deployment of over 38,000 GPUs, demonstrate a strong institutional commitment to strengthening AI infrastructure and enabling data-driven decision-making. Empirical evidence indicates that AI adoption has improved operational efficiency from 60–65% to 82–90%, increased agricultural productivity by 15–25%, reduced water consumption by 20–30%, and minimized energy transmission losses to 12–14%. In governance, AI-enabled systems have reduced leakages by up to 40% and improved beneficiary targeting accuracy to above 90%, thereby enhancing public service delivery. From an economic perspective, AI is projected to contribute $500–600 billion to India’s GDP by 2030 and generate 3–4 million employment opportunities, particularly in high-skill sectors. Additionally, AI supports environmental sustainability through 10–15% emission reduction and 25–30% water conservation. However, challenges such as 35–40% rural digital disparities, 60–65% data standardization gaps, and 8–10% increased energy demand pose significant constraints. Therefore, a balanced approach integrating technological advancement with robust policy frameworks, ethical governance, and capacity building is essential to fully harness AI’s potential for inclusive and sustainable development.