India has deregulated prices for diesel fuel while raising the cost of natural gas in the biggest-yet economic reform announced by new Prime Minister Narendra Modi's government.

The decision to allow market control of diesel costs starting Sunday targets one of India's costliest subsidies for one of the world's dirtiest fuels.

Those subsidies have helped make the country reliant on diesel to power at least 50 percent of all vehicles as well as many industrial and retail businesses, where grid connectivity is scarce or power outages common.

Natural gas tariffs went up about 33 percent to $5.61 per mBtu to increase the incentive for drilling, but Finance Minister Arun Jaitley asked state governments on Saturday to revise taxes "so that consumers are not affected by the price rise."