To answer your specific questions:
1) even if your consulate requires such an itinerary, don’t worry too much about it. Once you arrive, no one will ask you about it unless you happen to come in contact with the police (which if you stick to the law should be extremely rare). Worst case scenario: book a hostel for the whole time somewhere in Eastern Europe. make sure they have a refund policy and just cancel the stay after you get there. Then you are free to go and stay wherever you want, as long as you leave Schengen area on time.
2) You can make things as cheap or as expensive as you wish. I traveled for 6 months on 2,5 EUR a day, but let me tell you that is not easy at all. Obviously, that is extreme. But if you couchsurf and hitchhike (or buy a motorbike instead of renting one) you can cut your budget quite a lot. 7000USD is enough for 3,5 months of extremely comfortable traveling if you take care of what you do a little bit. Eastern Europe is cheaper then Western Europe though, so it also depends on where you go.
3) I’d say that buying and selling is probably far cheaper then renting. Especially renting from A and returning to B is usually quite expensive.
Your budget is more than sufficient.
Regarding the visa; I’ve never heard that you need to specify your intended itinerary. It is the very nature of the Schengen space that you can freely travel between all the countries that are part of it. You need to get the Schengen visa from the country that you are planning to initially enter.
I would second the opinion to use railways as the main transport vehicle. Renting a motorbike might be an option to explore the surroundings, specially in southern Europe (Corsica, Greece, Italy). But bear in mind, that in the big cities traffic can be overwhelming. But then again, it might be relaxing for you if your’re used to Indian cities’ traffic :).
The usual way for European students to backpack across Europe is to buy an Interrail pass and travel by train. 30 countries during one month in first class costs less than 1000€. Railways are very efficient in Europe.
Reply to #2:
A basic normal hostel should cost 20…25 Euro/Night in Western Europe, plan another 10Euro/Day for food. You could probably travel at 1000Euro/month.
Reply to #3:
I don’t know about any rental agencies who would rent out motorbikes in Europe. Motorbikes are for people who have to commute to work each day, or for students who need to get to school.
Either you rent a car (Europcar, Hertz, Sixt), or you take a train. Those rental agencies usually have a office at each airport or at train stations in big cities, and you should be able to get a car for a 1-way trip and drop it off in another town, but there might be a surcharge.
I don’t know what you need to get an european driving permit, but if you are from India keep in mind that most of the countries drive on the other side of the road.
My advice would be to take the train: it’s more relaxing, gets you everywhere and it’s most likely cheaper than renting a car and gets you there faster if you take the express train.
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