A group of skinny kids gather round to watch a dog eat. They're hungry, but the elderly woman who looks after the dog won't let them have even a mouthful of food as she ladles porridge into the mutt's gullet. Apu, as the dog is called, once belonged to Umprakkal, the potentate who has ruled this part of Kerala, a state in India, for years. It doesn't matter that Apu is rabid or that he kills ducks and fatally infects a boy. He is still venerated by his new owners.

We see the dog bolting its food several times in Murali Nair's new feature, A Dog's Day. Barely 70 minutes long, it's a gentle yarn about a small community coming to terms with its independence. For the first time, Umprakkal has permitted a democratically elected government to rule, but there is a drawback: the dog.

A bearded, thickset 34-year-old, Nair has a fair claim to be Kerala's greatest director - even if he has been living and working in Hounslow, London, for the past five years. I ask him whether he sees himself as a humanist film-maker in the vein of the great Satyajit Ray. "No, not at all," he replies. Nair doesn't watch many movies and isn't interested in talking about his cinematic influences, but he acknowledges an admiration for novelist RK Narayan, who died recently. Just as Narayan focused intently on the fictional community of Malgudi, Nair takes his inspiration from everyday occurrences in Kerala.

He isn't about to explain the allegory of A Dog's Day. The film, he insists, means whatever audiences want it to. Nevertheless, there are clear echoes of recent events. We may be in the heart of India, but Nair throws in oblique references to Kosovo. It's not too far-fetched to see the film as a study of a dying colonialism, to regard the dog as a symbol of the bad old order that the new regime can't quite shake off. Nair shows how a community can be torn apart by something seemingly trivial - the question of how to treat the old master's dog.

The original plan was to shoot in Zimbabwe (where Mugabe's repossession of white farmers' land would have lent an added resonance) or Malawi, but Nair eventually decided to go back to Kerala. It's where he grew up and he still loves it - but it's not, he says, an ideal base for a film-maker. Although there is a robust distribution system, with 22 cinemas in the capital for a population of 100,000 or so, Nair still struggles to get his films shown. Cinemas, he believes, are loathe to screen films like his that don't feature well-known stars.

Nair's first feature, Throne of Death, won the Cam¿ra d'Or at Cannes in 1999 and was acclaimed at festivals throughout the world, but received a muted response in Kerala. It's about a poor old man convicted of stealing coconuts, charged with murder and sentenced to death on an "electronic chair" that has just been brought to India as part of a World Bank loan package. To die on such a chair is considered a great honour.

Kerala is a communist state with a high literacy rate and a tradition of political tolerance. Nair's satirical movie was considered an affront by many local bureaucrats. "They didn't like me, as an outsider, criticising the policies of the government. The man in charge of state funding called it the worst film he'd ever seen in his life," Nair recalls. He was even attacked for being anti-communist, which he vehemently denies. "You get hurt by these types of things."

Nair runs his production company, Flying Elephant Films, from his home. Amazingly, his features are entirely self-financed. "When I make a film about the evils of globalisation, I should see to it that the process is also free from the evils of globalisation," he recently commented of his decision to turn down backing from western financiers (and to spurn a lucrative offer from Fox).

A Dog's Day was made with a tiny crew and a large cast of non-professional actors, all from Kerala. "There was a wonderful feeling of community. I was very happy that I worked with those people. You don't have to tell them what drama and theatre is. It's already there." He paid for A Dog's Day through his work for British television. (His credits range from Miracles of Faith, a series about the part that miracles play in people's lives, to First Tastes, a survey of the lives of teenagers around the world.)

Nair hasn't worked out what his next feature will be, or whether it will be made in Kerala, but he doesn't seem in a rush to shoot a movie in the UK. "To do a film in London, it has to be 'commercially viable'," he says. "Only then will they support you, but you can't do that with art."

• A Dog's Day is at Filmhouse, Edinburgh (0131-623 8030) tonight and tomorrow night.