Why does Ammu recognize Velutha as "the God of Small Things"?

Ammu first mentions the idea of “The God of Small Things” in Chapter 11, after she has a dream of a man with one arm holding her close. Not only is the man holding her close, but Ammu and this man are almost the center of attention in a crowd. In the dream, we don’t know who this man is, but it is suggested that he is “The God of Loss” or “The God of Small Things.”  

As Ammu dreams, Estha and Rahel watch her carefully so that they don’t wake her up. When she does wake up, she quickly realizes that the twins have just spent time with Velutha because of the wood shavings in their hair. This makes her realize who “The God of Small Things” is (Chapter 11):

By not mentioning his name, she sensed that a pact had been forged between her Dream and the World. And that the midwives of that pact were, or would be, her sawdust-coated two-egg twins. She knew who he was - the God of Loss, the God of Small Things. Of course she did.

While this may be the first moment that Ammu realizes her feelings for Velutha, the romantic relationship has been developing all along: from the time they were younger, when Velutha no longer had to stretch out his hands to give her gifts, to now, when her children refer to him as their best friend. Ammu almost predicts a tragic end by warning her children not to get too close to Velutha because something bad might happen.

Due to their opposing social statuses, both Ammu and Velutha know that their relationship has no viable future. Their love affair is all they have (Chapter 21):

Even later, on the thirteen nights that followed this one, instinctively they stuck to the Small Things. The Big Things ever lurked inside. They knew that there was nowhere for them to go. They had nothing. No Future. So they stuck to the small things.

Because of the narrative structure of the novel, the events are not presented in the order that they happen chronologically. However, the novel ends at a place that we could almost consider as the beginning - it’s the beginning of Ammu and Velutha’s love affair. Ammu leaves by telling Velutha “Tomorrow,” and he confirms “Tomorrow.”

Velutha becomes “The God of Small Things” because their relationship can only unfold and develop day by day, no matter how strong or legitimate their feelings are for each other.