Kashmir conflict

What are benefits and drawbacks to India letting Kashmir be an independent identity?

In August 1947, Kashmir was an independent state. However, within a month, Pakistan's armies were closing in Srinagar and the king was left with no option but to join India. The king had no power to stop a major army in its gates. 

There lies the problem. Given Kashmir's location (bordering China, Pakistan, Afghanistan and erstwhile Soviet republic of Tajikistan) it will never be left alone by the powers around it. It is only a third of Afghanistan's size, making it much easier for the great powers to play the game here just like they did & do in Afghanistan. By adjoining half-dozen troubled provinces in India's neighbors, the state will become a huge marsh for terrorism to breed. Can India afford to have another instable neighbor?

India's security goes into a toilet

Jammu & Kashmir borders the prosperous plains of Punjab and fairly accessible to the national capital (~ 6 hours/500km of driving in the plains from New Delhi to the borders of J&K). Thus, controlling the state would give India's enemies (both nations and terrorist organizations) a direct access to India's heart. Anyone who wants to put a knife in India's heart will try to have a camp in that state and the government there will be too weak to prevent this from happening.

Minorities get massacred

There was a time when Afghanistan had plenty of Buddhists and Hindus. Now, it doesn't. The Buddhist relics at Bamiyan got mercilessly destroyed and the same mercy was shown to the minorities. The same could happen in Kashmir if India vacates the place.

Apart from the valley around Sri Nagar, Jammu & Kashmir is a state with a significant population of Hindus and Buddhists. In the map below, the Muslim dominated parts of the north & west are already with Pakistan. Of the rest, there is a huge region of blue and beige. These two are the primary reasons India wants to cling on to the state. 

India's water access will be at threat

The only connection that India has with the mighty river of Indus (that gave our country its name) is Kashmir. Besides the cultural importance, Indus system is the biggest source of water to India's northwest. Although we gave up Indus waters (along with Jhelum and Chenab) to Pakistan, we got Pakistan to give us Sutlej, Ravi and Beas instead. Without the access and bargaining power of Indus, India will be left without a lot of water. That means more poverty and famines. Indus also helps us generate useful hydro power. 

Poor Economic Links --> Poverty

The state is landlocked and having hostile enemies all around will push the state into economic despair (like Afghanistan). Trade and tourism will suffer. Without India to bankroll, the state would be unable to afford more infrastructure projects. Most of its taxes will be spent guarding its borders and fighting civil wars. 

Disturbing balance in rest of India

India is a diverse political union built upon a share culture that has lasted thousands of years. Kashmir is a core part of this culture and any separation would weaken the Indian union. (hattip: Dhruv Pathak). Central Europe and Central Asia have been through such separations and it takes decades for such regions to settle down after a major separation.

Benefits

For the sake of completeness, I will also include the benefits to J&K as an independent nation:

1. The citizens of the state will have a better say on their own affairs (assuming no one else occupies after India leaves).
2. The state gets to have the main say on how Indus waters will be used. This could help in building more hydroelectric projects.
3. Kashmiris don't need to stand in queue along with rest of India when it comes to US Greencard and other permanent residencies (faster visas/greencards).
4. There will be better international recognition for the region  --> all the world nations will have embassies in Sri Nagar. Kashmir gets a seat at the UN and many other international bodies.
5. Rest of India benefits by not having to bankroll a troubled state and spending less on security (assuming Kashmir keeps its independence). Relationship with Pakistan might improve.

These benefits are substantially less than the mayhem that will come from the separation.

In short, making Kashmir an independent nation would be a terrible thing for everyone living in Kashmir and rest of India. Thus, you can be guaranteed that India will not cede an extra inch of land in that state regardless of whatever threats it is put into.