The home secretary said the government, in its pursuit to find a lasting solution to the Kashmir dispute, "has not spent enough time in identifying road blocks and challenges".
He said vested interests within the country and outside were some of these challenges.
"Pakistan may not be interested (in settling the Kashmir issue forever) but there are vested interests within the country who don't want it to be settled," Pillai said at a seminar, 'What is the way forward in Jammu and Kashmir', organised by the Jamia Millia Islamia University here.
"Whether it is politicians, security forces or any section of the society, each one has developed vested interests, Pakistan is a problem but we have problems with the country itself," the home secretary added.
These interests need to be "counterpoised" by the people from the state. "And that will come only through empowerment of the people," Pillai stated, adding that the government was considering greater devolution of power to local bodies to bring in a good governance.
To solve the Kashmir issue, Pillai asserted, every stakeholder within and outside the state needs to shed their stated positions.
"Everybody has to relook at its stand on Kashmir and start rethinking on how to solve the issue."
The official said the government-appointed interlocutors - journalist Dileep Padgaonkar, academician Radha Kumar and economist M.M. Ansari - would present their final proposal in April this year and the government was expecting a political solution to the Kashmir issue that is "acceptable" to people of all the regions of the state.
The interlocutors have so far submitted three reports specifying the "broad contours" for a lasting solution to the Kashmir issue for consideration by the government.
"When their final report comes, we will share it with all political parties, the union cabinet and decide on a future course of action," Pillai said.
The home secretary said the government was not keeping the problems in Kashmir "for discussions" as last year's summer agitation - which left 112 people killed in firing by security forces - was "an eye opener".
Quoting first prime minister Jawaharlal Nehru's remark to the Indian parliament, he said:
"It also came to the realisation that the decision will be made in the hearts and minds of the men and women of Kashmir, neither in this parliament, nor in the United Nations nor by anybody else".