I always hate to argue with a second grade teacher, but she is wrong on two counts. First, Indian can be used as an adjective, but it is primarily a noun. Second, it is capitalized since it refers to that group of aboriginal peoples who inhabited North and South America before your ancestors and mine showed up. Other words like this include Caucasian and Negroid, both of which are out of vogue today. How you explain to the teacher that she needs to correct her view about “Indian” is up to you. Good luck!