Mucormycosis usually infects people whose immune system has been compromised, causing blackening or discolouration over the nose, blurred or double vision, chest pain, breathing difficulties and coughing blood.
Doctors believe that the use of steroids to treat severe Covid-19 could be causing the rash of cases because those drugs reduce immunity and push up sugar levels.
More than 7,200 people in India have now been reported with mucormycosis and 219 have lost their lives.
Now five states, Tamil Nadu, Odisha, Gujarat, Rajasthan and Telangana, have declared an epidemic of mucormycosis in India, The Guardian reported.
The state of Maharashtra alone has recorded 1,500 cases and 90 deaths from the illness. Hospitals in Delhi are reporting 15 to 20 new cases a day.
Health Secretary Lav Agarwal said in a letter to state governments that mucormycosis had emerged as a new challenge for Covid-19 patients on steroid therapy and those with pre-existing diabetes.
"This fungal infection is leading to prolonged morbidity and mortality among Covid-19 patients," he said in the letter seen by Reuters on Thursday.
Mr Agarwal asked state governments to declare it as a "notifiable disease" under the Epidemics Act, meaning they have to identify and track every case.
India on Thursday reported 276,110 new coronavirus infections over the previous 24 hours, slightly higher than a day earlier but well below the 400,000 high seen at the beginning of this month in a devastating second wave.
The total caseload stands at 26million, the world's second highest after the United States. Deaths rose by 4,209 in Friday, taking the total tally 291,331.
But with hospitals and crematoria overflowing and the health system overwhelmed, it is widely accepted that the official figures grossly underestimate the real impact of the epidemic, with some experts saying infections and deaths could be five to 10 times higher.
The second wave has penetrated deep into the countryside and the additional burden of mucormycosis has hit a rural health system ill-equipped to cope.
SP Kalantari, a doctor based in Sevagram, a town in Maharashtra, said that a team including ear, nose, and throat surgeons, ophthalmologists and neurologists was needed to treat mucormycosis.
"Unfortunately, this kind of team does not exist in rural areas," the doctor said.