I agree that this side story / quest just has too many issue and not sure it could be fixed without a lot of work.

At the end of the day, does it really effect the main story of Goblin VS Tieflings?

I love that Larian trying to add all these side quests but I doubt they have the resources to make them all perfect so I would rather that time goes into the main quest.

I would suggest the following.

1. Drop the Kagda kills the kid. Without the child dying, no reason for Zelvor to want to hire you to kill Kagda.
2. Tone down the xenophobia and just have Kadga focus on sealing the inner grove. As far as she is concerned, the Tieflings can keep the outer caves, her Druids will be safe in the inner grove.
3. Set a timer of like 7 Long Rests for Kagda to seal the inner grove if the Tiefling have not moved into your camp.
4. If the inner grove is sealed, you lose access to the Halfling trader.
5. The Goblins still need to be dealt with so the Tieflings are safe.
6. If you decide to side with the Goblins, check to see if inner grove is sealed, if so, double the Tiefling defenders to get the Goblin raid that feeling it now has. Minthara will be upset at you about not being able to kill all the Druids but still should be able to follow her betraying you in your camp stuff.
7. If you defeat the Goblins, have Hassan comment about being uphappy that the inner grove is sealed but he joining your camp so it not like he really cares about the grove.

I think it would be easier to trim down this subplot to make it seem more logical without really effecting the main story much.