Public Sector Banks (PSBs) have been pivotal in molding the economic foundation of India by enabling credit access, ensuring financial inclusion, and advancing core sectors like agriculture, small and medium-sized enterprises (SMEs), and infrastructure development. PSBs, with their leadership presence in India's banking sector, form the financial backbone of the country. Their value addition goes beyond money transactions to address issues like poverty reduction, creation of employment opportunities, and industrial growth. This research examines the multi-dimensional role of PSBs in India's economic development, examining their role in infrastructure financing, credit delivery to priority sectors, and financial inclusion programs. Through the extension of affordable financial services to poor people, PSBs have played a major role in narrowing the urban-rural gap and facilitating equitable economic development. Despite that, these banks continue to struggle with issues such as increasing NPAs, regulatory pressures, and competition from foreign and private sector banks. These inefficiencies of governance and bureaucratic bottlenecks also restrict their operational efficiency to some extent, raising questions over their long-run viability. The article also analyzes the different reforms and policy interventions brought about by the Indian government and the Reserve Bank of India (RBI) to make PSBs more efficient and resilient. Initiatives like capital infusion, mergers of banks, digitization, and better credit risk management have played a key role in strengthening the banking system. The launch of the Insolvency and Bankruptcy Code (IBC) has also contributed importantly towards enhancing the credit recovery mechanisms and solving the problem of bad loans. PSBs, despite all the setbacks, remain an indispensable part of India's financial system, facilitating inclusive growth and economic development. The research concludes that although structural vulnerabilities are present, strategic reforms, technology uptake, and good governance can guarantee the long-term sustainability and competitiveness of PSBs. The future initiatives should be aimed at enhancing risk management frameworks, improving operational efficiency through digitalization, and creating a more customer-oriented banking experience. Through these interventions, PSBs can continue to remain an integral part of India's journey to a $5 trillion economy.