Sundried I'm sorry you feel so hurt about this. As others have said, I don't think it's always the norm for grandparents to go to their grandchildren's parties. However, I do think it was a bit insensitive to, in effect, be told that you can't see your grandson at all on his birthday - if only to give him a hug and his present. On the other hand, it may well be much more relaxing and enjoyable if, as jingle suggested, he comes round to your house for a special tea on another day. To be honest, children's parties can be pretty exhausting and you probably wouldn't get much chance to talk to your grandson as he'll be too busy charging around.
As your daughter-in-law doesn't see her own mother, there are obviously some major issues there. It may be that your daughter-in-law is just a rather "difficult" or easily stressed person. Or it may be that, for example, her own mother was very controlling/interfering - which would make your daughter-in-law wary about "mother figures" in general.
Try not to take it personally, and enjoy the times when you do see your grandson.