The incident took place on Sunday night at a residential government school at Tikiri, in Rayagada district, about 420 km from state capital Bhubaneswar, when the teacher was watching a television show along with some children, a senior district police official said.
The teacher was staying in the school. The assailant allegedly entered the school room and poured kerosene on her before lighting the match, the official said.
Itishree Pradhan, 28, sustained more than 90 percent burn injuries. She was rushed for treatment to a hospital in Vishakapatnam in the neighbouring state of Andhra Pradesh where her condition is stated to be critical, he added.
The official said Pradhan had filed a complaint with police against school inspector Netrananda Dandsena in July for molesting her. Dandsena is absconding since then.
A committee against sexual harassment at work place, which also probed the allegation, had recommended action against Dandsena early this month after finding him guilty.
The man who set her on fire had allegedly threatened her to withdraw the complaint against the school inspector.
"The district administration has suspended the school inspector, a district inspector of school and a police officer who was investigating the molestation case," the official said.
Police have formed a special team to nab both the culprits, the one who set her afire and the school inspector, who had molested her some months ago, he added.