Hi Dean,
You have asked questions over a wide range and answering all of them will require a lot of writing! We Indians are brought up with the idea that Kashmir is ours and Pakistan is trying to hijack it. But, the more I look at it objectively, the more it appears that India wasn't 100% honest in taking Kashmir in the first place.
After independence, the subcontinent was a cluttered mess of over 300 princely states. In most cases, the local rulers held a referendum and decided on its basis whether to join India, Pakistan or remain independent. Most cases were straightforward, except Hyderabad and Kashmir.
In Hyderabad's case, the majority of the people were Hindus and wanted to accede to India. Moreover, it was right in the middle of the newly formed Indian state and would have no land connection to Pakistan. However, the Muslim ruler, Nizam wanted to join Pakistan. India's response was to take police action and force the Nizam to accede to India.
Exactly the opposite situation existed in Kashmir. They had a Muslim majority, eager to join Pakistan but a Hindu ruler. India acted quickly and got the ruler to join India. Pakistan responded by marching into Kashmir and they managed to capture territory, which is now Pakistan Occupied Kashmir. So strictly speaking, they had a legit claim on Kashmir back then.
Kashmir is important to us mainly because of the Geo political strategic location. Before the fall of USSR, Kashmir was close to the boundaries of Pakistan, China and USSR (Now, I think Kazakh). Kashmir is the gateway to India for Pakistani terrorists as well as China, so it is very important to us. It is also close China, hence it is important to the Americans, who are itching to have a base here, and hence keep meddling in the issue.
As for the Kashmiris, they have been harassed for 60+ years by Pakistani terrorists as well as the Indian army. They have not had a fair share of India's progress, and hence many of them want to separate from India. I dont pretend to understand their situation sitting so far away, but for some reason they are not happy with India at the moment.
About literacy: a huge percentage of population depends on agriculture, and going to school is simply not a priority for many village kids. Even if they do go to school, its for the free meals, after a certain age they drop out and work in farms.
64% is low, yes, but its not really coming in the way of India's development. This is because, there are more serious roadblocks like secondary and higher education, and demand for skilled labour. I believe that if education provided immediate and tangible returns to a rural family, they would ensure that all their children are educated. I think that education rate in India is a result of demand/supply and not of a lack of schools.
Also, I would point out, that 64% rate also means that we are honest in our census surveys. I am not sure you can say the same about countries with one party rule.