My impression, for what it's worth, is that literacy is usually considered the stage before (full-fledged) language use. (And the third stage would be literature, reading for serious meaning and not just practical use.)
Literacy with preschoolers, or adult non-readers as well, would be mainly learning the names, sounds, and shapes of the letters and numbers. (That's why in many languages it's called alfabetización, Alphabetisierung, etc., as grinsessa mentioned.)
Language, in contrast, would be speaking, reading, and writing -- using the symbols and sounds to actually create meaning, forming sentences and expressing thoughts, using language to communicate.
However, if the context is two different grading categories on a report card for the same group or age level, you might be right that in that particular case, the emphasis could be more on some kind of contrast between written and spoken language, like letters and numbers vs. stories and songs. That could seem misleading to me, because language is really the superset that includes both speaking and writing. But if some intended distinction like that seems likely, it might be good to check with the school and see if that hunch is in fact the case.