Its hard to tell from the photo, but comparing the pads to the size of the other parts, it looks like your pads are worn down to the end of their useful life.
I could be mistaken on that, you would need to measure the pad thickness and see what the limit is.
Just to be clear, only the pads are touching the rotor (dragging a bit all the time), or is some other metal part touching the rotor (disk) now?
It is normal for the pads to skim the surface of the rotor, they do not retract like drum brakes, they are always just touching, and its the pressure squeezing them onto the rotor that makes the bike stop.
if you put the bike in neutral with the rear tire off the ground, does the wheel spin freely, or is it dragging to the point where its hard to turn.
and also, do the brakes work at all if you step on the pedal?