2 Answers

That would depend on what you are grinding. If the instructions that came with your grinder calls for water cooling, the grinder may be a large stone grinder used for sharpening metal objects by hand or is used to grind beveled edges on glass. Both of these call for water cooling so as not to heat the objects or reduce the grinding efficiency.  These are the only two types of grinders that I know of that use water for cooling in the grinding process…but there may be others. 

Probably because water is a lot cheaper and has been used for generations without problem.

Originally grindstones for producing items like scythes were powered by water wheels so water was used for cooling.