Summary: India’s drone sector is pivoting from an assembly-led model to an innovation-led ecosystem. While drone import prohibitions did not completely restrict assembly of imported components, evolving regulations and policies increasingly favour indigenous design, IP ownership and domestic manufacturing. This blog analyses the impact of the proposed Defence Acquisition Procedure 2026, investor expectations and localisation requirements, which point towards a future where companies that own technology, build resilient supply chains and manufacture will be best positioned for growth.
Drone makers in India are facing a defining choice. Over the next decade, they will have to decide whether to climb up the value chain through innovation and ownership of designs, or to assemble imported components while optimising for short-term margins. Recent regulatory developments, the ongoing defence procurement opportunities for the industry and the redesigning of the Defence Acquisition Procedure make the first option the only sustainable one.
The policy architecture over the past five years also points in this direction. The Drone Rules, 2021, liberalised the civil use and operation of drones with fewer approvals, a lighter licensing regime, and transitioned all procedures onto a unified digital platform. Additionally, the Director General of Foreign Trade in 2022 banned imports of drones in completely built-up, semi-knocked-down or completely knocked-down (CBU/SKD/CKD) form, with limited exceptions for R&D, defence and security purposes.[1] Import of components, however, remains permitted.
The Assembly Loophole: This distinction allowed entities to import drone components in fragmented consignments, which could be assembled into complete drones. The word “component” in Foreign Trade Policy has been defined broadly to cover one of the parts of a sub-assembly or assembly of which the manufactured product is made, leaving the implementation of the ban to subjective assessment.[2] Whether such consignments can be considered as prohibited knocked down drones has been debated before the customs tribunal. In IZI Ventures[3], the tribunal examined the issue of whether drones seized under multiple bills of entry by two related entities can be construed as CBU/SKD/CKD forms. Prima facie, the tribunal found that the department has not established a one-to-one correlation between the imported consignments and accordingly ordered their provisional release. However, jurisprudence on this front will continue to evolve. While entering the industry by assembling drones from components may serve as an initial foothold, this approach has inherent limitations related to scalability. Significant procurement opportunities and substantial funding are generally directed toward organisations that own the design and IP, innovate, or expand the local manufacturing base.
Defence Changes the Calculus: This exposure becomes more acute as the industry continues to focus on the defence sector. This is evident from the expanding use and application of drones, from surveillance and intelligence gathering to combat. The defence sector is going to be the biggest customer of the drone industry, as programmes run for decades and orders run into millions. The draft Defence Acquisition Procedure 2026[4] restructures procurement towards indigenisation by raising the indigenous content requirement, by requiring proof of indigenous design, and by pressing for design data and source code in Indian hands. This signifies moving from a “Made in India” approach to “Owned by India”. The courts have been deferring to executive policy goals in indigenisation[5]and to the technical committee for content verification.[6]
What Investors Actually Price: Ultimately, the incentives for the industry, such as the production linked incentive scheme and the regulatory environment, have been calibrated to value addition rather than just assembling components. Investors and evaluation committees are also focusing their attention on a narrow set of questions. What platform or IP do you own? What can you modify without a licensor’s permission? What happens to your product line if a foreign supplier stops shipping tomorrow? With rising indigenous content thresholds, the assembling imported components route is going to be difficult.
The future belongs to companies that will move up the value chain through deep tech innovation, proprietary IP and manufacturing at scale. Investors, customers and governments value technology ownership, design capability and supply chain resilience over mere assembling capacity. Going forward, these will be the attributes that attract capital, win order books, sustain valuations and build long-term sustainable businesses.
[1] DGFT Notification No. 54/2015-2020 dated February 9, 2022 (Policy Condition No. 3, Chapter 88, ITC(HS), 2022).
[2] Paragraph 11.10, Foreign Trade Policy, 2023.
[3] IZI Ventures Pvt. Ltd. v. Commissioner of Customs, Nhava Sheva-V, 2026 SCC OnLine CESTAT 1031
[4] Draft Defence Acquisition Procedure 2026, Ministry of Defence
[5] Union of India v. A.B.P. Pvt. Ltd. 2023 20 SCC 343
[6] Coreip Technology Pvt. Ltd. v. Union of India, 2024 SCC OnLine Del 9414 (Delhi High Court).