Is it necessary to pull out a baby tooth if it is badly decayed (large cavity)

If it is very bad and the decay could spread or is causing pain/bleeding, etc. yes.

If the tooth is badly decayed and can't be saved with doing a "pulpotomy" (similar to a root canal on an adult tooth) then yes the tooth should be removed. If it is going to be a year or more before the adult tooth comes in then a space maintainer should be cemented in to hold the place for the adult tooth.