What does '__init__.py' do in Python?

The __init__.py file in Python is used to mark a directory as a package and runs any setup code required for the package. It is essential for allowing Python to recognize the folder as a package and enabling imports from it. The file is executed every time the package is imported, and it can be used to define which modules or functions are accessible when using a wildcard import (from package import *). The tutorial demonstrates how to create a package, define modules, and use the __init__.py file to manage different import behaviors.