Its primary source of income is agriculture and tourism. The reason there's conflict over it is because there's a problem with who actually controls it. Pakistan was supposed to received all the surrounded majority muslim areas but kashmir's ruler agreed to give control to India. They've been fighting over who was the rightful government for awhile now. China got involved since Pakistan ceded a part of their claim to them which made no sense and was done when China and India didn't get along. Look at this to learn more.
http://en.wikipedia.org/wiki/Kashmir