Drone Start-Ups Need R&D Incentives More Than PLIs, Say Industry Players

Despite the government of India’s introduction of a Rs 120 crore Production Linked Incentive (PLI) scheme in 2021 for the drone sector, many early stage start-ups in the sector are not happy. Industry insiders argue that what young drone start-ups really need are research and development (R&D) incentives to help the sector thrive.  

According to the PLI eligibility criteria, drone companies must have an annual sales turnover of at least Rs 2 crore, while drone component manufacturers need a turnover of at least Rs 50 lakh, and 40 per cent value addition. However, for start-ups, these thresholds are hard to meet. Already grappling with limited funding and small order books, many fail to qualify under the scheme. 

Arjun Naik, chief executive officer of drone start-up Scandron, a subsidiary of Magellanic Cloud explains, “PLI scheme is good only if you are producing and selling in large volumes. It benefits companies that are already having large orders and are doing well, not the start-ups. We need R&D incentives to indigenize components instead of relying on imports.” 

“Start-ups like ours neither have any support funds to innovate nor do we have huge order books, how will we ever benefit from production incentives? We need an R&D fund first, PLI comes in the picture very late,” concurs the founder of another drone start-up who doesn't want to be named.

Experts are of the opinion that the nascent Indian drone industry's growth potential hinges on strong R&D to enhance local value addition and without high-quality indigenous products, start-ups will struggle to compete.

“PLI comes in when the company is producing large scale and that might not be true for start-ups, so indeed govt needs to come up with some kind of initiative for R&D, like it did to the the space sector, the Rs 1000 crore fund, although it is not much for the kind of sector it is, it is a very big signal,” says Ashish Kumar, co-founder and general partner of Fundamentum, a venture capital firm backed by Infosys cofounder and Aadhaar architect Nandan Nilekani. 

“The government needs to show the intent to support drone start-ups towards R&D, that will not only help them from the government’s side, but also attract domestic and global VC's, as they'll see that this field has the desired support from the government,” he adds.

Start-ups Struggling to Qualify for PLI 

Not surprisingly, the financial eligibility requirements of the PLI scheme meant that the bigger companies made the cut.

In FY23, beneficiaries of the PLI scheme included major players such as ideaForge Technology, Garuda Aerospace, Sagar Defence Engineering, EndureAir Systems, and Throttle Aerospace Systems. These companies, with combined annual sales of Rs 319 crore, significantly outpaced the start-ups struggling to scale. IdeaForge, for example, recorded revenues of $41.6 million in FY23, while Garuda Aerospace reported $5.86 million, both exceeding the PLI criteria. IdeaForge's consolidated revenues for Q4 of FY24 stood at Rs 102.3 crores, which had around 12 per cent PLI incentive, as per their earnings call.   

According to publicly available data, the government made Rs 30 crore of disbursals under the programme in FY23.

R&D As The Key to Growth 

The sector currently faces significant funding challenges, with only $49.7 million in total funding during FY23, according to data from Tracxn Technologies. By comparison, ed-tech secured $283 million, fintech an impressive $4.5 billion and AI has bagged $168.4 million—more than three times the investment in drones. 

According to venture capital firms, the long gestation period of drone technology also makes it a riskier bet for investors, as profits are not as quick as they are in a B2C business, further contributing to the funding crunch. 

Kumar of Fundamentum suggests that a targeted initiative for R&D, similar to the Rs 1,000 crore fund for the space sector, would serve as a strong signal to foster growth in the drone industry.

He however cautions that the selection process for R&D support must prioritise start-ups demonstrating genuine innovation, rather than supporting all entrants in the sector, as that would foster true research capabilities. 

The government could introduce tax incentives for funding approved R&D programs, similar to those provided to the pharmaceutical industry in the 2000s, to encourage greater investment, according to Ashish Bagadia, Partner, Corporate Finance and Investment Banking, BDO India.

“There are limited dedicated testing facilities for drones in India, making it difficult for start-ups to validate their products effectively. Similarly, there are limited facilities for locally building quality components for protypes. There is a need for industrial license for non-defense drones as well. These gaps can slow down innovation and product development,” says Bagadia.

Dr. Abhishek, co-founder of EndureAir Systems, advocates for a stronger emphasis on R&D, noting that during his PhD in the US, research on unmanned aerial vehicles (UAVs) was funded by the US Army. “The Indian government needs to prioritize research and development with a long-term vision,” he said, adding that the PLI corpus should be revised and extended to make it more accessible to new entrants. 

Nikunj Parashar, CEO of Sagar Defence Engineering, supports this view, calling for the creation of an alternate investment fund (AIF) specifically for drone start-ups to help tackle the funding challenge and enable innovation. 

Sujit Jagirdar, interim CEO of T-Hub, which works with major drone start-ups, concurs. He acknowledges that while the PLI scheme is a commendable effort to boost manufacturing, it is difficult for early-stage start-ups to navigate the journey from innovation to large-scale production. “R&D incentives are essential to truly support innovators. The government needs a framework that includes direct R&D grants, tax breaks for research spending, and affordable access to advanced testing facilities,” he said. 

Jagirdar also suggests that the PLI scheme be amended to reserve a portion of the funds for start-ups with limited manufacturing capabilities, ensuring that smaller players aren’t left behind as the industry grows. 

Certainly, India’s drone start-ups are at a critical juncture. Without more accessible R&D funding and a more inclusive approach to government incentives, these companies' risk being overshadowed by larger, more established players. The current PLI scheme, while beneficial for those already successful, leaves little room for innovation at the grassroots level. For the sector to thrive, both the government and the broader ecosystem need to offer more support to the smaller players, providing the research incentives they need to truly take off.