Man, what a great episode. It felt like the culmination of the entire series up to this point. Like Buff said, if the series had ended here I almost wouldn't complain.
I loved how in the flashbacks you can see the progression of the villagers opinion of him as they go from calling him "the fox kid" to "Naruto".
It's also nice to know the village was actually hearing about all the great things Naruto was doing. The series had been kind of making it seem like everything on the missions was secret. And nobody knew how awesome Naruto was.
Although, wtf with Sakura getting to hug Naruto while Hinata just watches. That's messed up. I didn't see Sakura getting almost killed to save him. She doesn't deserve hugs!
I believe the emotional payoff for this episode more than makes up for the loss of narrative weight that came from Pain ressurecting everyone. If half the village was still dead, I doubt the mood in the village would have been positive enough for Naruto to be receiving the welcome he's getting now.
The whole village thinks she's an angel. And if Pain was the Rain's leader, then she's the next in the chain of command anyway. Why would she even need to "take over". She's the rightful ruler.