Does Salman Rushdie deserve a knighthood for his writing? Probably not - or at least no more than several other unknighted authors. Rushdie is an important writer, though not to everyone's taste, and his early work such as Midnight's Children and Shame is his best. His later work is pretty ordinary.
But think back to 1988 and the publication of The Satanic Verses and the fatwa that was announced against Rushdie. Remeber how a succession of weaselly appeasers such as Douglas Hurd (though he was far from the only example) went out of their way to try to mollify the extremists, book-burners and would-be assassins, rather than standing up to them and bringing them before the courts. Hurd and his sort tried to distance themselves from the Satanic Verses and the Foreign Office brought pressure to stop the book being published in paperback. Meanwhile Rushdie went in fear for his life, for years.
I think the K should be viewed as an apology to Rushdie for leaving him high and dry when the fatwa was announced and a belated acknowledgement that freedom of speech and artistic expression matter.