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A shriveled caudex is indeed an indication of a thirsty plant! Try watering it a bit more often or watering it deeper—in other words, make sure that the soil gets properly soaked at each watering (but still allow it to dry out between waterings).
Note that if your area experiences a noticeable winter season, the plant could also just be going into seasonal dormancy, which means that it won't need as much water as it does in spring/summer when it's actively growing. Still, the trunk should have a fuller appearance, so find a watering schedule that brings the plant back to a healthy-looking state.
If this new sprout is growing from the very base of the tree, at ground level, then it is a "pup"—in other words, a baby ponytail palm.
If the new sprout is growing from the point where the wide base of the tree narrows, it is likely a new stem starting to form. This usually only happens when the tree is damaged and dies back to the wide base, though.
In either case, you can leave it alone if you'd like to have a two-stemmed tree or a little stand of palms... However, if you do leave it attached, note that the tree will spend energy growing the new stem or pup rather than on its original stem. If your goal is to have the tallest ponytail palm, I would recommend cutting off the new sprout.
It probably wouldn't hurt to repot and refresh the plant's soil a bit, just to give it some new nutrients and room to grow! The sickly-looking leaves could have also just been a result of winter conditions indoors—if it was too cold, too dry, or too wet, this can produce browning leaves.
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