NEW DELHI (AFP) - India said Saturday it was freeing diesel prices from government control, marking another step to ease the state's grip on the economy and propel reforms by the new pro-business government.

Prime Minister Narendra Modi's administration also hiked natural gas prices to spur exploration in the fuel-import dependent nation. Huge energy imports contribute to India's trade deficit.

The decision is providing a fillip to investor hopes that the government may take more steps to modernise India's economy and revive stumbling growth.

However, the jump in natural gas prices will increase the cost of running power stations and fertiliser plants, and will raise cooking gas costs and other prices, potentially stoking inflation.

The government had controlled diesel prices using subsidies under a programme intended to shield the poor from soaring fuel prices.

But domestic fuel prices have now exceeded global rates, allowing refiners to sell at a profit and setting the stage for deregulation.

Economists had described the situation as a "golden moment" for the government to deregulate diesel prices after years of paying crushing public subsidies.

India's central bank governor Raghuram Rajan earlier in the week had urged the government to "seize" the opportunity of the dramatic global fall in energy prices to end diesel subsidies.

The move has been long urged by economists to reduce the giant subsidy burden on the government and help it close a gaping spending deficit.

"The prices of diesel will be market-determined at both the retail and refinery gate level for all consumers" and move in tandem with international prices, the government said in statement.

The step would "benefit consumers due to greater competition among oil companies and more choices", it added.

The previous Congress government had launched the process of deregulating fuel prices by ending controls on petrol prices.