She was just never established as a credible threat. Whatever the equivalent of castration is for a female, that's what they did to her during the scene where Indy and Marion have their squabble when they're reunited and Spalko just stands there with a patient, amused smirk. Can you imagine Mola Ram doing that? Donovan, of all people, shot Henry Sr. when he wanted Indy to know he meant business.
Even the heroes act like she's a joke. Spalko cocks a gun behind Marion's head, and Indy's response is another quip. The script undermines her menace at every turn, right from the first scene when she's established as a psychic whose first act is to fail to do something psychic. And as far as I can tell there's no actual payoff to justify that strange choice.