* Modi urges collaboration with large modern stores and online retailers
* BJP leader in favour of nationwide goods and services tax
* Foreign ministry should focus on "economic diplomacy", Modi says
NEW DELHI, Feb 27 (Reuters) - Indian opposition candidate for prime minister Narendra Modi said on Thursday the country's millions of family-owned traders must learn to work with large modern stores and online retailers, in comments that could signal a shift in thinking.
Modi's Bharatiya Janata Party (BJP) opposes a policy to allow foreign supermarkets to open in India, which it says is a threat to millions of grocery stores and traders who are a backbone of the party's support.
Sketching out his economic views ahead of a general election likely to be held in April and May, Modi declined to reiterate that stance or oppose a proposal to allow foreign investment in online shopping, which is growing rapidly in India.
Instead, he said small traders should put an emphasis on the quality of their products to compete better. He said they could enter into contracts with big online retailers to create "virtual trade".
"We should not worry about the challenges from global trade," Modi told a meeting of the Confederation of All India Traders. "The government should not look to curb online trade. We should not worry about these things, our children have taken IT to the world. We'll have to embrace it."
Modi also said he favoured introducing a nation-wide goods and services tax (GST), a long-planned reform to usher in a uniform market, cut business costs and boost government revenue.
The country's states have stood in the way of a GST, fearing that they would face revenue losses if the current array of inefficient levies were replaced.
Chief minister of Gujarat, one of the country's most industrialised states, Modi is campaigning on the back of a record of strong growth over more than a decade in office. But until Thursday he had given few details about how he would steer the economy, which has seen growth at its slowest in a decade.
The Hindu nationalist leader also said India needed to cut red tape by reducing the number of laws, and called on the foreign ministry to focus on "economic diplomacy" to improve India's commercial standing in the world.
"Times have changed, the core work of external affairs ministry today is trade and commerce," he said.
In an effort to attract overseas investment and revive the economy, Prime Minister Manmohan Singh threw open the country's $500-billion retail industry to foreign investors late in 2012.
That allowed companies such as Wal-Mart Stores and TESCO Plc to own majority stakes in Indian chains for the first time, pending approval by individual states.
This month, the newly elected BJP government of the western state of Rajasthan became the second state government to roll back the policy. Fewer than half of India's 28 states have agreed to implement the policy.
The traders had hoped Modi would vow to make opposition to foreign retailers a part of the party's manifesto, which is due to be released in the next few weeks.
"This looks like a strategic direction which is being set ahead of the elections and it's a very welcome one," said Kishore Boyani, chair of the retailer Future Group.
"These comments and clarity will help everyone in the industry and foreign players to take decisions."