Hi,
The 1.7 SDI is a very familiar model.
The origins clearly trace back to the 1.7D engine in the T3 from 1986.
The 1.7D engine (engine code KY) is based on the old 827 engine block and is essentially a 1.6TD (not a "D" because it uses the reinforced block/crankshaft of the 1.6TD and has piston bottom cooling) with the bore of the later 1.9D engine (engine code 1Y). The valve size is also the same as the 1.9D. Therefore, the 1.9D is essentially a 1.7D with a longer stroke.

. As is well known, the 1.9TDI engines (1Z, AHU, AFN) are based on the engine block of the 1.9D or TD engines (1Y, AAZ).
So, the 1.7-liter diesel engine is not a step backward from the 1.9-liter engine, but rather its origin!
The 1.7-liter engine was never offered with a turbocharger, neither as a swirl chamber diesel nor as a TDI; therefore, the 1.7 TDI would have been a very late upgrade of a very old naturally aspirated diesel engine.
End of the brief excursion into VW diesel history

.
Regards,
Jens.
Marcus "Ar Gwenn": Für uns sind Leute arm, weil sie mit einem Eselskarren unterwegs sind, für sie sind wir arm, weil wir ein Leben lang dafür arbeiten und Geld verdienen müssen, um uns im Alter von wildfremden Leuten pflegen zu lassen.