Climate change may cause severe hydrological droughts, leading to water shortages which will require to be assessed using high-resolution data. Gravity Recovery and Climate Experiment (GRACE) satellite Terrestrial Water Storage (TWSA) estimates offer a promising solution to monitor hydrological drought, but its coarse resolution (1°) limits its applications to small regions of the Indus Basin Irrigation System (IBIS). Here we employed machine learning models such as Extreme Gradient Boosting (XGBoost) and Artificial Neural Network (ANN) to downscale GRACE TWSA from 1° to 0.25°. The findings revealed that the XGBoost model outperformed the ANN model with Nash Sutcliff Efficiency (NSE) (0.99), Pearson correlation (R) (0.99), Root Mean Square Error (RMSE) (5.22 mm), and Mean Absolute Error (MAE) (2.75 mm) between the predicted and GRACE-derived TWSA. Further, Water Storage Deficit Index (WSDI) and WSD (Water Storage Deficit) were used to determine the severity and episodes of droughts, respectively. The results of WSDI exhibited a strong agreement when compared with the Standardized Precipitation Evapotranspiration Index (SPEI) at different time scales (1-, 3-, and 6-months) and self-calibrated Palmer Drought Severity Index (sc-PDSI). Moreover, the IBIS had experienced increasing drought episodes, e.g., eight drought episodes were detected within the years 2010 and 2016 with WSDI of −1.20 and −1.28 and total WSD of −496.99 mm and −734.01 mm, respectively. The Partial Least Square Regression (PLSR) model between WSDI and climatic variables indicated that potential evaporation had the largest influence on drought after precipitation. The findings of this study will be helpful for drought-related decision-making in IBIS.