The Ceylon Motor Traders' Association, an industry body, says higher import duties, a weaker exchange rate and higher interest rates is slowing demand for motor vehicles in the island.
"With all these negative factors we can expect a drop of around 30 to 40 percent in vehicle registrations to an estimated total of around 360,000 this year," Tilak Gunasekekera, chairman of the Ceylon Motor Traders Association said.
Car registrations at the Department of Motor Traffic have dropped 26 percent to 21,884 in the first half of 2012 from 29,883 a year earlier.
Motor trade officials say a state import duty hike has sent prices of smaller cars (below 1000 cubic centimeter engine capacity) like the Indian-made Maruti Alto up putting them beyond reach of the people with modest incomes.Sri Lanka's finance ministry jacked up taxes on cars in particular after credit taken to manipulate oil prices and more than 250 billion rupees printed to manipulate interest rates and monetize the budget deficit sent the rupee down from 110 to 130 to the US dollar.
Authorities have had a habit of imposing trade controls on citizens ever since a money printing central bank was created in 1951, which created high inflation and 'foreign exchange shortages'.
Authorities singled out car owners and motor cycle owners to hit the hardest, while potential truck and bus owners were left relatively untouched, in line with the discriminatory state interventionism that has been generally practiced in the country in past half century.
Analysts say a general rise in interest rates or a depreciation of the currency is neutral across citizens.
Car industry officials say the hardest hit are citizens with modest means, who were planning to move to cars from motor bikes.
"People like to shift from two wheels to four, now that dream is shattered," Gunasekera said.
"They should have increased taxes on a fairer platform. This is far too high" he said.
In May the sales of Maruti Alto, Sri Lanka's best-selling car fell to 288 units from 537 units in April 2011, an analysis by JB Stockbrokers, an equities research house showed.
According to data from Sri Lanka's Department of Motor Traffic registration of smaller cars below 1000cc engine capacity has dropped to 7,343 in the first half of 2012, compared to 12,432 registrations in the same period last year.
"The government should have encouraged smaller cars at a time when the world is looking for economical and smaller cars to fit into their cities," Gunasekera said.
At the moment state workers however get 'permits' to import tax slashed cars, in another discriminatory practice.
The agents for a top Japanese brand said they expected profits to drop 35 percent this year and their sales were now mostly confined to state orders or those coming from 'permits'.
Analysts had also warned that imposing trade controls are in fact an economic sanction imposed on a country by itself and problems with the exchange rate - which come from monetary policy - should be addressed monetarily.
Cars which were charged higher duty even after a tax cut give revenues to the state and prohibitive taxes that reduces imports will expand the budget deficit, driving interest rates higher or requiring fresh taxes on other goods.
In the 1930s, the so-called 'Great Depression' was also worsened and a recovery delayed by trade controls.
Motor trade officials say the industry contributed about 35 billion rupees by way of taxes to the state. In 2011 the Department of Motor Traffic had also earned 7.0 billion rupees in various registration fees.