The development comes on the heels of demonetisation.

The island nation has put restrictions on the extent of funding a bank can do for automobile purchases from early 2017 to control forex outgo. Earlier, banks could fund up to 70 per cent of the value. However, now, funding is allowed only up to 25 per cent of the value in case of three-wheelers and up to 50 per cent for cars. This implies that buyers will have to pay large cash upfront from their own pockets. However, banks can fund up to 90 per cent of value in case of commercial vehicles. Nepal has brought an identical restriction on funding for cars.

Sri Lanka, which mostly relies on imported vehicles, had also raised the customs duty on cars, two-wheelers and three-wheelers in November last year. The duty structure has changed from being import price-based to engine capacity-based and this has, in general, increased duty incidence by about 30 to 40 per cent in motorcycles and 15 per cent in three-wheelers.

“The combined effect of higher duties and financial restrictions has particularly and severely impacted the three-wheeler industry, which is reduced to one-fourth of what it used to be. The impact on the motorcycle industry has been less severe but it has also shrunk by about 30 per cent,” said S Ravikumar, president (Business Development) at Bajaj Auto. Sri Lanka ranks among the company’s top ten markets worldwide.

"Bajaj has been a strong market leader in Sri Lanka for several years in both motorcycles and three-wheelers, with an overwhelming market share of 70 and 90 per cent, respectively,” Ravikumar added. He declined to share export volumes done by the company to Sri Lanka. According to certain estimates, the local two-wheeler market is estimated to be 250,000-300,000 units a year in Sri Lanka. The market size of three-wheelers is not known but the existing population of these vehicles is in excess of one million and the government wants to control its rapid growth.

Until recently, Sri Lanka was the biggest export destination for India’s biggest car maker, Maruti Suzuki. Not any longer. Regular tinkering with duties has taken away the attractiveness. “Sri Lanka and Nepal are important export markets. There may be some short-term impact (from recent measures). We are studying the developments closely. We will take appropriate corrective measures to further minimise this impact. Overall, we are on course to meet our target for exports this year,” said a Maruti spokesperson. Maruti, which has the maximum share in the Sri Lankan car market, is estimated to be selling about 6,000-7,000 cars a year in the island nation. The annual demand is estimated at 50,000 vehicles but the market shrunk significantly in 2016.

Last year, Renault and its alliance partner Nissan started exporting India-made cars to Sri Lanka. However, this has upset their strategy. Sumit Sawhney, the country CEO and MD at Renault India, said that the Sri Lankan market has a high growth potential. “In last few years, we have seen a drop in industry volumes due to various regulatory changes. The recent actions impact the consumers’ purchasing power and in turn, affects the industry,” he said. Renault, which entered the neighbouring market in June last year, shipped around 4,500 units of Kwid until December.