You've already been provided the most common answers, since those particular reasons for needing a Microsoft account have been around the longest and are thus the best known, which since they typically relate to the services like OneDrive, Outlook Email/Contacts, and other even more apparently marketing-based products like Microsoft 365 (Office products), seems to only fit into those easily avoided product categories.
However, what few other than those who've long been involved in the support of Microsoft products like the Defender security suite, Windows/Microsoft Update(s), Windows Hello and the related FIDO2 initiative and the online web pages that support these realize, is that Microsoft has been logging into many of these services in the background for over a decade.
Since the Windows Hello and FIDO2 are quickly evolving to be the official methods for authenticating to not only the marketing-based services, but also the Microsoft and 3rd-party network services in general, including those I just mentioned above, my own assumption having been involved with all of these is that Microsoft will soon switch to an authentication required Internet ecosystem.
In other words, if you want to use any Microsoft product and be provided support, attachment to Microsoft's servers for security, updates, obviously authentication and in fact any use of a Microsoft product will inherently require the use of a Microsoft account.
Will there be a way around this for this for commercial users with extreme security requirements like governments or high-security commercial installations that often require the use of isolated facilities with no access to external networks? Of course, those have always and will continue to be supported precisely because they're isolated and along with not being at risk of direct attack as a result, are also not part of the risk profile that requires most if any of the services I've previously mentioned, so they're not really the problem.
OTOH, will individual personal systems not otherwise connected to a domain account that provides support and management of these same services for a subset of Windows devices that are also internet connected, be allowed to operate in this way? Probably not.
This evolution from an individual, separate and in fact often isolated standalone set of 'personal computer' systems into an Internet connected, global computing ecosystem has been going on under all our noses for decades, but most have been oblivious to what that truly means from not only a security, but even just a logistics standpoint.
Exactly what all of this means and how it's evolving in an official (Government) sense isn't something I've seen mentioned, though I can't truly say I've been looking for it either. However, that it's been going on in the background and becoming more necessary and thus required as time goes on, has been relatively obvious to anyone with the type of security focus I had during my entire career in computing.
Does this new set of requirements create a potential concern relating to privacy? Yes. But in truth that's no different than the problem that already exists within every single social networking system on the Internet, while the need for a legal structure to ensure that these abilities aren't abused exists regardless of whether you're directly identified or only loosely associated with the devices you use as is the case at the moment.
Few truly understand to what extent they're already being tracked across not only individual ecosystems, but really across the Internet as a whole, regardless of what they believe they may have done to stop it. Believing that avoiding the creation of an account on a single ecosystem will stop this is not realizing the scope of the issue.
I personally have no problem providing Microsoft with my account login details, since I know how to use their provided controls to protect and reduce the effects on my true privacy, which I've been using and tuning for over 2 decades now. Disconnection from my Microsoft account is in no way part of my own set of concerns relating to the issue of privacy, since I know it would do nothing to aid in that effort.
Rob