India and Taiwan have started negotiations for a free trade agreement and a Taiwanese company to set up a semiconductor manufacturing facility in India. This is an important step that signals their determination to put bilateral economic engagement on a broad basis overall. If the move to build the semiconductor plant is successful, it will be the second such facility to be built by a Taiwanese company overseas after a similar center in the United States, people familiar with the development said.

The Indian government has already proposed a number of locations for the facility and one of Taiwan’s leading semiconductor manufacturers, including Taiwan Semiconductor Manufacturing Company (TSMC) and United Microelectronics Corporation (UMC), could implement the mega-project.

The facility is being set up in response to the growing demand for chips in India, including from automakers and tech companies, when there is a global chip shortage.

People said that the proposal to set up the semiconductor center is mainly driven by the strategic importance of India-Taiwan relations, not the commercial aspect.

“The semiconductor plant in the US was set up with a view to the close strategic ties between the two sides. That will also be the case in India,” said one of the people named above.

The government on Wednesday unveiled a plan offering Rs 76,000 crore worth of incentives to encourage the establishment of semiconductor design, fabrication and display manufacturing units (fab) with the greater goal of making India a global center for to do electronics production.

In line with their drive to expand economic engagement, India and Taiwan have already held two rounds of talks to consolidate a free trade agreement and a bilateral investment agreement to strengthen trade ties, people said.

India has fostered its trade, investment, tourism, culture, education, and personal exchanges with Taiwan.

Trade, investment and industrial cooperation between the two countries has been on the rise in recent years.

The volume of bilateral trade has increased almost six-fold, from $ 1.19 billion in 2001 to nearly $ 7.05 billion in 2018, and India ranks 14th among Taiwan’s largest exporters and 18th according to official figures of the largest import sources.

At the end of 2018, there were around 106 Taiwanese companies in India with total investments of 1.5 billion in services.

The two sides have also formed teams to further develop connections in the education sector and for qualification training.

An estimated 2,800 Indian students are currently studying in Taiwan.

India does not have formal diplomatic relations with Taiwan, but both sides have commercial and personal ties.

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

The ITA was also authorized to provide all consular and passport services.

In the same year Taiwan also founded the Taipei Economic and Cultural Center in Delhi.