People outside of India often embellish or exaggerate too though, even if not close to the degree that I've experienced in India (disclaimer: this is my own opinion based on my own experiences over 10 years or so. Obviously India has a lot of great, honest Engineers, our organisation never sees them though, largely because we don't pay well enough).

The reference knows the candidate and likely feels a much closer connection with them than they do with you. Assuming the candidate isn't an asshole, they will want to help them out by giving them a good recommendation. If the candidate was let go due to downsizing or such, the reference may even feel pressure to help the candidate find a new job.

So it's a great data point to have and as you say, it can help weed out the straight up liars.

But any 2 given candidates with 5 years at Acme Inc are not interchangeable. Some candidates are just better at programming (or some subset of it) than others, and I think employers try to find ways to predict that at interviews.