Kenny Baker was essentially a puppeteer.
From an interview with him
In some scenes you are inside R2-D2, in other scenes, it is remote controlled. Is there (apart from the scenes where R2 is rolling) an easy way for the viewer to see whether it’s you or the remote-controlled droid?
By R2’s extension leg. When they were using that, they swapped R2. I can tell when I am in it because I know the way I move. For others it is hard to tell. The R2 I use is the two-legged one, the one that reacts to dialogue. When it is moving, chasing or rolling; no way my R2 can do that! That one has the third leg, the motor and the steering device.
Most scenes you have done were with Anthony Daniels (C-3PO). How was it to work with him?
We were both in our droids; there was no interconnection at all. We couldn’t hear or see each other. George (Lucas) used to shout “look left, look right” and wanted me to project emotions like happiness and sadness. It wasn’t very easy, which also applies to C-3PO. He had to record his dialogue later on which had to match his movements. He had way more movement because he had arms and legs. I didn’t have that, so it was very hard to communicate. He came in an hour before me to get in the costume, while I just needed 5 minutes to get into R2. When we were done, they took the lid off and I am out! He needed another hour to get rid of the costume. So, we never met a lot.
As to why there is still an actor in the suit? This largely comes down to Abrams wanting to do things with practical effects as much as possible, and to do things the way Lucas and company did during the production of the original trilogy.
Production designer Darren Gilford explained at a Comic-Con panel.
"J.J.'s mandate from day one was authenticity and being as true to the original trilogy as possible. And he felt the prequels were flawed by the fact that they had every [CG] tool known to mankind and used everything at their disposal. I use the metaphor of disco when the synthesizer came about and everyone was using it in any way possible. And I think J.J. wanted to reconnect with how the original films were made."
The article explains:
The generational theme of J.J. Abrams' "The Force Awakens" naturally carried over to the crew, including the production design partnership between two-time Oscar winner Rick Carter ("Lincoln," "Avatar") and up-and-comer Darren Gilford ("Oblivion," "Tron: Legacy"). Gilford told me it was a very fluid, symbiotic collaboration built on a back-to-basics, hybrid philosophy via Abrams for maintaining continuity with the original trilogy.
This entailed shooting as much in-camera as possible and using lots of practical sets, models and matte paintings. They also reverse-engineered the VFX to accommodate, for example, 2D forced perspective backings rather than relying on CG set extensions from Industrial Light & Magic. You can glimpse this in a corridor shot in the Comic-Con making-of reel (see below). Of course, there's plenty of CG but only when expedient.