The four-year study found that infants between three to 19 months displayed higher learning scores, if a range of family and friends -including grandparents - took care of them, rather than just parents.
According to Federal Families, Housing and Community Services Minister Jenny Macklin, simply spending time with grandchildren, reading to them, cooking together and taking them shopping can significantly influence kids' development.
She said that grandparents were the unsung heroes of the Australian family unit, providing a strong support base by lending a hand and boosting family life.
"This new study demonstrates just what a critical role grandparents play in the development of children," theage.com.au quoted Macklin, as saying.
The research involving more than 10,000 families also showed that breastfeeding for longer and cutting out TV were also key in bringing up happy, healthy children.
The National Health and Medical Research Council (NHMRC) recommends mothers breastfeed exclusively for at least six months, however, the new study showed that most mothers had not done so for long enough.
Moreover, the majority of children had diets that did not meet nutritional guidelines and many preferred less physical activities.
The study also showed that children who read more - alone or with a parent - and watched less TV were likely to have better developmental scores across the board.
"We know from this study how important it is to a child's development to ... spend as much time as possible everyday reading and spending time playing with children," said Macklin.