'Khaliyar' And 'Kaliyar'
I have not read the English translation of the above work, so I dunno whether the etymology of 'khaliyar' is explained there (in the original, it is not). What follows is mostly my guesswork.
The 'aar' ending is an honorific so we need only to understand 'khali'. Presumably, it is a corruption of 'khaleefa' (same as the English world 'caliph'), which in Arabic means 'successor' or 'representative'. And Nizam Ali is of course, the self-appointed corporeal representative of the Muslim saint, Syed Miyan Sheikh, whose spirit benignly watches over the lives of Khasakians.
The semi-literate rural folk of Khasak address the otherworldly Nizam Ali as 'kaaliyaare!', where the initial 'kha' sound is corrupted to 'ka', a common occurrence in Malayalam and elsewhere.
Recently, I came to read in eminent academician NVP Unithiri's autobiography about 'Vayathur Kaliyar', a titular deity of his family. My initial reaction was "Hey, that is interesting. A very traditional Hindu family has a Sufi mystic as a 'Kula Devata'!" (well, I do know of a few 'Tam Brahm' families who venerate Nagore Andavar, a Sufi saint as a family deity but in Kerala such cross-religious veneration is traditionally very rare among 'upper' caste Hindu families).
But then, I came to know that 'Vayathur Kaliyar' is actually the local name of the presiding deity of a well-known temple (dedicated to Siva) in the far north of Kerala. And apparently there is also a well-known 'Kaliyar kovil' somewhere in Tamil Nadu. Wonder how Siva got this name. Perhaps it is from the goddess 'Kali', his consort. But then, in both Malayalam and Tamil pronunciation, the 'l' in 'Kali' is 'retroflexed' - and that of at least 'Vayathur Kaliyar' is not!
Note added on 5th of July 2007: I saw the English translation of 'Khasak'. 'Khaliyar' is translated as 'Khazi'. Looks like this khazi is a corruption of 'qazi' (~ expert in religious law) or 'ghazi' (~conqueror of the infidels), neither of which matches with the character's role as the chosen representative of a higher spiritual power => more murk!
Note added on 18th of April 2009: There is a dargah called 'Kaliyar Sharif' near Haridwar. The place is also called 'Piran Kaliyar'. The first word is probably pronounced 'peeraan', the plural of 'peer' (= spiritual master) - maybe the dargah is the resting place of more than one Sufi saint. Moreover, spelt as it is in English, 'Piran' could just as well be pronounced 'piraan', the Tamil world meaning 'lord' or 'master'. The double-meaning must be just a coincidence - or is it??