I have a coarse pepper grinder, and it says not to grind over steaming pots, why is that

I've owned several grinders -- both blade and burr, but I've never had one that did this. So no I would not say it is normal

Is the lid closed tight when you start it? Blade style ones are pretty cheap, so you might just want to get a new one.

Chilies are dried before grinding. There are several ways to dry them:

• Leave them in an exposed part of the fridge for several weeks. There should be a lot of open air around it, to allow moisture to escape.
• String them up outside. To do this, poke holes and run strings through them and tie the strings up so they're spread out. For best results, you should do this during hot, dry weather, and ensure they get plenty of sunlight. Expect it to take several weeks.
• Oven-dry them at low temperatures. You want temperatures to be under 150°F/65°C so as not to cook them, and it will take several hours to a day or two. Reduce the temperature if you see the peppers darkening or turning black. Rotate the peppers regularly to allow even drying, and leave the oven door slightly open to allow moisture to escape. If you wish to have a little more roasted flavor, increase the temperature.
• Use a freeze-drying machine or dehydrator.

Discard any peppers with rotten spots, both before and after drying. Before grinding, remove stems and seeds.

Grinding: I've successfully used a blade-type coffee grinder to grind dried peppers into flakes. A blender or food processor should also work, assuming you are handling larger quantities. I must confess puzzlement about what exactly a "mixer-grinder" is, even after consulting the link. I believe the appliance may not have an exact equivalent in Europe or the United States. However, if it is suitable for blending or grinding it should work fine for dried peppers.

I should add that you ought to wear gloves when handling the peppers, and beware of the fumes from the dehydrator or oven, as they may be very pungent. In extreme causes, protective goggles may be a good idea.