India and Taiwan have started negotiations for a free-trade agreement and the setting up of a semiconductor manufacturing facility by a Taiwanese firm in India, in a significant step signalling their resolve to broad-base the overall bilateral economic engagement. If the move to set up the semiconductor manufacturing plant succeeds, then it will be the second such facility to be set up by a Taiwanese company in a foreign country after a similar hub in the United States, people familiar with the development said.

The Indian government has already proposed a number of sites for the facility and one of Taiwan’s leading semiconductor producers, including the Taiwan Semiconductor Manufacturing Company (TSMC) and the United Microelectronics Corporation (UMC), may implement the mega project, they said.

The move to set up the facility comes amid increasing demands for chips in India by automakers and technology companies, among others, when there is a global shortage of chips.

The people said the proposal to set up the semiconductor hub is largely driven by the strategic significance of the ties between India and Taiwan, rather than the commercial aspect of it.

“The semiconductor plant in the US was set up in the reflection of the close strategic ties between the two sides. It will be the same in India’s case as well,” said one of the people cited above.

The government on Wednesday unveiled a plan to provide incentives worth Rs 76,000 crore to encourage the setting up of semiconductor design, manufacturing and display fabrication (fab) units with a larger goal of making India a global electronics production hub.

In sync with their keenness to expand economic engagement, India and Taiwan have already held two rounds of talks for firming up a free-trade agreement as well as a bilateral investment agreement to boost trade ties, the people said.

India has been promoting its ties with Taiwan in the areas of trade, investment, tourism, culture, education and people-to-people exchanges.

The cooperation in the areas of trade, investment and industry between the two countries has been on an upswing in the last few years.

The volume of bilateral trade has grown nearly six-fold from USD 1.19 billion in 2001 to almost USD 7.05 billion in 2018 and India ranks as Taiwan’s 14th largest export destination and 18th largest source of imports, according to official data.

By the end of 2018, around 106 Taiwanese companies were operating in India, with the total investment amounting to USD 1.5 billion in the fields of information and communication technology, medical devices, automobile components, machinery, steel, electronics, construction, engineering and financial services.

The two sides have also set up teams for further expansion of ties in education as well as skill development training.

At present, an estimated 2,800 Indian students are studying in Taiwan.

India does not have formal diplomatic ties with Taiwan but both sides have trade and people-to-people ties.

In 1995, New Delhi set up the India-Taipei Association (ITA) in Taipei to promote interactions between the two sides and facilitate business, tourism and cultural exchanges.

The ITA has also been authorised to provide all consular and passport services.

In the same year, Taiwan too established the Taipei Economic and Cultural Center in Delhi.