Agarkar said that the selectors should look at Virat Kohli's performance as Test captain by comparison, and take a call on Dhoni's role in the limited overs format after the ongoing South Africa series.
India lost the Twenty20 International (T20I) series 0-2 against South Africa after the third match was washed out at the Eden Gardens on Thursday.
"He (Dhoni) has been a great player for India, but you don't want him to become a liability for the team. And he needs to perform a lot better than he has been. Just because he has done it over the years, doesn't mean it's okay for him to fail," Agarkar was quoted as saying by ESPNcricinfo on Friday.
Ahead of the five-match One-Day International (ODI) series against South Africa, Agarkar said he was delighted that India's squad has been boosted by the genuine pace of Umesh Yadav, something he felt was lacking in the T20Is.
"Dhoni keeps saying you don't need to be a fast bowler, you need to be a good bowler, but it has been shown in T20s, you need bowlers with quality. They (fast bowlers) can and will have bad days in the shorter format. And that's where I think the selectors need to almost put their foot down at times with M.S. Dhoni. He is, at times, way too practical, which doesn't work for the team anymore," he said.
"You would rather have someone like Umesh who can make a difference with those one or two wickets which can change the game rather than someone who is going to bowl line and length all day," the former pacer added.
The 37-year-old was also highly critical of Dhoni's decision to bat at No.4 in the ODIs, insisting that such a move would be unfair on somebody like Ajinkya Rahane and "would not work for the team."
"I'm not convinced he should bat at four. Just after a World Cup, you're now trying to develop your team for the next World Cup. Four years is a long time, but for Dhoni, towards the end of his career, to put himself up, I'm not sure about it," he said.
"You can understand if there are batsmen who can't bat 3 and 4. But there is Ajinkya Rahane, who has been one of your best players in Test cricket and I don't think he can bat lower than four in ODIs yet, unless he changes his game over his career," Agarkar added.
Agarkar said that the selectors might have some big decisions to take at the end of the ODI series regarding the future of the Indian team in limited overs cricket.
"The selectors maybe need to look at where the Indian team is heading because Virat Kohli has done well as captain in Test cricket so maybe the selectors need to make that call after this series," Agarkar said.