This is a common phrase employed to convey the fact that the speaker felt so embarrassed that they wished they cease to be. (I ceased to be. ഞാനങ്ങ് ഇല്ലാണ്ടായിപ്പോയി)
Now, consider what an embarrassed person would actually mean by that? That they felt like (or actually did) disappearing unable to deal with embarrassment.
How does one do that?
One way of disappearing is to blend in with the surrounding. You make yourself disappear by acting as if you were just an extension of your surrounding world.
To say ഞാനങ്ങ് ഇല്ലാണ്ടായിപ്പോയി (I ceased to be) is to say that you became so much an extension of the world. You have ceased being not by deleting yourself, but by becoming an extension of everything around you.