How does 8032 execute program?
No, you can't use the internal RAM to hold code. The 8051/8032 uses a Harvard architecture, which means that it has completely separate memory spaces for code and data. Instructions are fetched from code space, but the RAM resides in data space.


  Now after enabling EA and connecting the PSEN how does 8032 execute the program?


The 8032 fetches instructions from code space. Since EA is asserted, these fetches (memory reads) appear on the external memory bus, with PSEN asserted. When PSEN is NOT asserted on an external memory read operation, it is a data-space read.


  What happens if I turn on the system?


The 8032 begins fetching instructions from code space address 0.


  How does the program counter of 8032 microcontroller executes intructions?


The program counter is simply responsible for holding the address of the next instruction to be executed. Other parts of the CPU execute the instructions.


  From which address of external memory the program should be read?


Address 0.

If you want to use interrupts in your program, there are other addresses in low code-space memory that are reserved for them, so the code that you execute on reset will eventually have to "jump around" those reserved addresses.