No, telemetry is not something MS needs to fulfil the primary purpose of VS Code. Best example is that the OSS version is there, without any telemetry enabled by default, still doing by and large the same job.
Legitimate interest doesn't mean absolutely essential.
The OSS version obviously benefits from the telemetry (to the extent telemetry is useful) because it's downstream of the version developed based on the telemetry.
No, telemetry is not something MS needs to fulfil the primary purpose of VS Code. Best example is that the OSS version is there, without any telemetry enabled by default, still doing by and large the same job.