> I am using 'hg diff' with ~/.hgrc set to 'git = on' and this time, naively removed the '--git' from the output of 'hg diff' instead of commenting out 'git = on' in the config file :(

You don't need to do that. I've been using the same setting [1] for 5 years without having a single problem. If you have a fresh clone of https://hg.python.org/cpython/ and using the 'default' branch, you're good.

[1]

[diff]
git = True
showfunc = True
unified = 8