I can understand the tracing of the correct shape and spelling of words and letters. Repetition of the correct way to do things is an excellent way to learn, the sandpaper thing is just psychotic though. It makes no sense.
The only thing I can think of is that she is trying to make them learn by punishing their mistakes through pain, but it is still a terrible way to do things. it is messed up. Even working on the principle of trying to have them remember just by the tactile feel of non smooth paper, the sandpaper still is excessive. Not to mention that if it was based on that she would have made sure that the tracing was done lightly so as not to harm anyone and stopped if there was any injury, like a good teacher should do.
That some people become teachers truly amazes me sometimes.