India drone focus: Market cheers policy regime while takeover fears stalk start-ups

The agriculture drone sector in India is emerging from a protracted policy vacuum, with recent regulatory momentum affording the industry rapid expansion into segments such as agrochemical spraying and seeding activities. Among other industries, the agriculture sector has benefited the most from a largely favourable, albeit still evolving legal framework involving the use of drones, and the resultant expansion in market access.

Crop Science Market Reporting has been closely tracking the policy movements in this sphere and has analysed several factors influencing the domestic agriculture drone industry. The findings are based on interactions with stakeholders, visits to drone research and development centres, and participation in field demonstrations.

Government estimates place the value of the drone manufacturing industry in India for 2020-21 at Rs 600 million ($7.6 million at the current rate). The estimates anticipate the value surging to Rs 9,000 million in 2023-24 ($114.1 million).

Manufacturing push

Policy deliberations in the aftermath of the Covid-19 pandemic have focused on safeguarding industrial supply chains from unforeseen disruptions, with the government pursuing a drive to align manufacturers with its plans for insulating supplies from foreign headwinds. The administration has taken a bullish stance on specialty manufacturing, and the nascent agriculture drone industry is being aided by a regime of subsidies and financial incentives.

Since the approval of the government's production linked incentive (PLI) scheme late last year, the drone industry has been riding the favourable tide to implement enhanced localisation. The system ensures that the sector receives a preferential 20% incentive, determined on the basis of value addition, that is to be calculated on annual sales revenue from drones and allied components by setting aside the purchase cost of such products. It covers a broad range of drone essentials and has piqued the interest of players, with a number of entities undertaking specialised operations such as forging of carbon fibre-based airframes in-house.

While the PLI scheme covers critical drone parts such as airframes, engines, batteries, navigation and communication systems, cameras, sensors and sprayers, the trend of domestic production has expanded to advanced hardware and software as well. Industry observers anticipate the development presenting businesses with considerable cost advantage when compared with employing the services of contract manufacturers situated abroad.

Although significant fund infusions have been carried out to incorporate technologies such as artificial intelligence (AI) and machine learning into drones, many manufacturers are upbeat about recouping their investments within a few years by leveraging economies of scale, especially as more farmers come onboard to use the new technology. Furthermore, efforts are under way to localise the production of minute components, including semiconductors and microchips, so as to sequester the industry from issues such as the ongoing global shortage of semiconductors.

The end-to-end approach involves building most parts of a drone in-house or through national suppliers, while only highly specialised components such as graphic modules and imaging sensors, among a few others, are sourced from foreign players.

On the computing side of things, open-source operating systems such as Android and Linux have found favour with developers, who have been coming up with smartphone applications and drone controllers in Indian languages to make the most of an untapped market.

Institutional funding

While the civilian use of drones in India is regulated under a strict set of guidelines, the idea of using the technology in agriculture had gained traction over the past couple of years with the domestic agrochemical industry urging the government to design a policy. Now that an initial regulatory regime is in place, many of the businesses testing the waters are established Indian players that already service sectors such as mining, surveillance and law enforcement, and defence.

While establishing greenfield drone facilities that involve the acquisition of land and procuring even basic equipment to start shop are extremely capital intensive, the national budget published in February laid down funding arrangements for start-ups and rural enterprises to boost the sector. The funding will include blended capital raised under a co-investment model through the country's National Bank for Agriculture and Rural Development (NABARD), which is an apex regulatory body for overall regulation of regional rural banks and apex cooperative banks in India.

To drive adoption of the new technology, guidelines under the government's "sub-mission on agricultural mechanisation" have been amended to provide up to 100% of the cost of agricultural drones, or Rs 1 million ($12,680), whichever is less, as a grant to relevant state-run authorities. Farmer producer organisations (FPOs), on the other hand, are to receive up to 75% of the cost of drones as grants, while a "contingency expenditure" of Rs 6,000 ($76) per ha is to be handed to implementing agencies that wish to hire drones, instead of making outright purchases. The Ministry of Agriculture and Farmers' Welfare anticipates the move enabling such entities to undertake "large-scale" on-field demonstrations of the technology.

Furthermore, existing custom hiring centres under FPOs and rural entrepreneurs are eligible to receive 40% of the basic cost of drones and its attachments, or Rs 400,000 ($5,072), whichever is lower, to purchase drones for providing agricultural services. The Ministry highlights that subsidised procurement will enhance the affordability of the technology, besides "significantly" encouraging domestic production of drones.

The average cost of an agricultural drone in India varies from Rs 800,000 ($10,144) to Rs 1 million ($12,680), although prices could reach as high as Rs 1.5 million ($19,020) with added functionalities and options.

Takeover fears

The Indian market has long been in the crosshairs of global agrochemical giants vying to expand their digital agriculture offerings, and with the market opening up, several new businesses are wary of unequal competition from established rivals. Many start-ups feel that such players enjoy the advantage of having fully developed digital platforms that can be offered as trials to woo clients already using their agrochemical offerings, adding that they leverage economies of scale, the likes of which would take years for smaller players to develop.

The marginal businesses also fear that global firms could engage in predatory pricing and eliminate competition by offering services at rates that the smaller players would find hard to match.

While the notification of the drone rules raked in significant investments in the space and some new players are flush with cash, an ongoing funding winter across the Indian start-up ecosystem has complicated matters. Many anticipate the funding freeze extending to the drone sector, driven by weak macroeconomic fundamentals in several markets, and exacerbated by Russia's ongoing invasion of Ukraine. Consequently, cash burn could emerge as a serious issue for the start-ups as they wait for the storm to blow over.

Industry watchers anticipate these concerns spurring consolidation in the space, observing that it has already been set afoot with many global firms approaching Indian businesses for controlling stakes or outright acquisitions. With new funding hard to come by, reports suggest that some of the smaller players have been compelled to bite the bullet. As a case in point, Indian diversified business conglomerate Adani Group's (Ahmedabad) subsidiary, Adani Defence Systems and Technologies, acquired a 50% stake in Bengaluru-based drone business General Aeronautics in a cash deal a little over a month after the Ministry issued an interim two-year approval for drone-based spraying of almost all pesticides registered in the country.

Where things stand

India released a standard operating procedure (SOP) involving the use of drones for the application of pesticides in agriculture, forestry and non-cropped areas in December 2021. This was followed by an approval to spray 479 formulations containing single active ingredient as well as combination products in April this year.

The rules require operators to abide by existing regulations, including obtaining a unique identification number (UIN) from the Indian aviation watchdog, the Director General of Civil Aviation (DGCA), besides ensuring that the drone hardware and firmware are compliant with the latter's Digital Sky platform. An unmanned aircraft operator permit (UAOP) is to be obtained in case the operator intends to deploy the drones commercially. Precautions to be implemented include the calibration of the spray system to ensure optimum nozzle output, marking of proposed treatment areas, setting up of buffer zones between drone treatment and non-target crops, and confirming the presence of water sources in the vicinity of treated areas, among others.

The SOP notes that the drones must include features such as "return to home" (RTH) on empty tank and be able to resume the mission from the point where RTH was engaged. Furthermore, it mandates that drone operators electronically submit spray monitoring data to India's Central Insecticide Board & Registration Committee (CIB&RC) within seven days of undertaking spraying operations.

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Posted 18 July 2022 by Akashpratim Mukhopadhyay, Senior Journalist, Crop Science Market Reporting, S&P Global Commodity Insights

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.