@oristarA,
It can mean that, yes. Sometimes people use it more informally to describe someone who's just arrogant or self-important, too. The phrase I hear most often is "S/He has delusions of grandeur." Having delusions of grandeur, medically speaking, can be one of a group of symptoms associated with schizophrenia and maybe other disorders. Paranoia itself isn't a delusion of grandeur; they just often occur together, I think. I could be wrong. Maybe someone will pop by and correct me on that.