Is there a way to replicate the Display in Navigation option for folders in Media tab.
Ex: if we have root/folder1/2/3/abc.pdf. Is there a way to hide 3 in the file path without physically deleting the folder 3 and without moving the file itself.
The Display in Navigation isn't for that. It's used for when you want to mark a page as not rendering in whatever custom navigation system you used to output say a primary header. What you're looking for is a custom route which would remove the folders from the generated URL that episerver would return as part of it's framework. https://world.episerver.com/documentation/developer-guides/CMS/routing/ would be the place to look at for this