"gradually instill notion" is the right formation as per the sentence meaning..
So AC

A looks awkward, given the fact that the statement is a conclusion..
so C.

I am not sure about the grammar rule here though.. There might be some rule which clearly removes A with reference to the -ing

The rule being tested here is the parallelism in structure "X is Y". So both X and Y need to be parallel.

Those who figure out the requirement of parallelism in the original sentence would be tempted to choose option E, since E also maintains the parallelism. But beware, it is not the notion that is gradual, it is the action of instilling.

Although I am not happy with option C, but C looks best among the available option. The better sentence would have been

To speak habitually of the "truly needy" is to instill gradually the notion that many of those who are just called "needy" actually have adequate resources; such a conclusion is unwarranted.

Hope that helps..