Let me very honest, simple way....
India doesn't want to lose territory and nor pakistan.
India will not give a single inch of kashmir and nor Pakistan
India will never ready for Independent J & K(Including PAK kashmir & GB) and nor Pakistan.
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Solution:
Option 1. Go for WAR..... who will win, take the entire J & K. But do you think that possible?
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Option 2. Time Pass - Sell dreams to our people and make money (which one our leaders are doing from many decades)
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Genuine Solution (As per me) : Make LOC as permanent border and give kashmiri people to special identity proof from both country so that they can travel to any place in J & K with very minimum security checks. They can do free trading between both part of kashmir.
Army should be withdraw from both side and only police to stay for maintaining law & order.
There can be add many things in this option that can serve faithfully for kashmiri people.
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In the real world, There is a only one option. Make LOC as permanent border and both should stop interfering in internal matters.
Except this solution u r talking about hasn't worked out in the entire existence of India/Pak. Throughout all this time...all the ups and downs in the economies, political environment, wars(between the two)...LOC has more or less remained the same ever since Kashmir was split up between the two. If that solution was realistically an option it would've happened by now and yet it hasn't happened.
The reason why it hasn't happened is bcuz of ego...
India doesn't want to let go of its claim on Pak's Kashmir bcuz India doesn't wanna look weak by just giving up territory that it claims it's own. Moreover India considers itself strong...strong enough that it holds out hope that it can someday snatch away that Kashmir from Pak by force.
Pakistan on the other hand doesn't want to let go of its claim on Indian Kashmir bcuz that would also make Pakistan look weak. It would make it look like that Pak bowed down to India and has accepted Indian hegemony just like how other smaller countries in the region do like Bhutan/Sri Lanka/etc. It would also be considered a strategic blunder bcuz of the water issue since the rivers that flow in Pak originate in IOK and Pakistan stands to gain territory in the event of a neutral plebiscite due to a large Muslim population of IOK(which are mostly either pro Pak or pro independence...due to the behavior of Indian armed forces like shooting pellet guns).
So u see even though LOC has more or less existed as sort of an international border between India/Pak...neither would be willing to accept it as an official border for reasons described above.
The only reason which may interest both India/Pak is the following...
Money and Safety/Security(from each other and a possible nuclear war)
With this in mind a solution can be worked out...
The Kashmir issue has caused both nations to spend billions of dollars throughout their existence to continue to build up/maintain their offensive/defensive capacity against each other. If Kashmir issue is resolved then there would hardly be a reason to fight. For the last 70 years the money spent by both(India/Pak) on defense expenditures and waging wars is probably more than the total value of Kashmir in terms of land/resources/man power. So if they could achieve a solution to this...they can plug a hole of billions of dollars spent in defense expenditures.
Secondly the safety part...for Pak its obvious...it faces a foe that has more manpower/resources/budget/etc. If that front can be eliminated(by achieving peace), it would be highly desirable.
For India though it enjoys conventional superiority vis a vis Pak, it still has to constantly worry about two fronts. Having enemies to fight on two fronts is a strategic nightmare. Throughout history fighting wars has proven a disaster for the party engaged in a two front war. So if India could achieve peace with Pak...it would be(or rather "should be") highly desirable for India if it ever hopes to challenge China.
Last but not least...it would reduce if not outright eliminate the threat of a nuclear war between the two.
So keeping in mind the above two driving factors...now a realistic solution must be figured out...more on that later...since I gtg right now
Consider this PART 1.