Hmm... : (SPOILER)I really don't know which way to go with this. It would be a little more "logical" to assume that everything was real, and the adults were simply blind to it. I doubt this theory only because of how the scene with the Captain and the mandragora were set up. Yeah, we saw the Captain holding and burning the mandragora... in a scene that was basically shot from Ofelia's point of view (I think). How do we know it wasn't a dead cat or something?

I need to see it again to pay closer attention to some of the details. I don't remember if any of the adults actually mentioned her mother getting better when Ofelia wasn't around. That will be the key for me. Until then, I'm going to assume it's an incredibly dark tale about a delusional child.